Sectoral similarity of banks’ business loans and its negative externality in China

We analyse the sectoral similarity of banks’ business loans and seek implications for this indirect interconnectedness as a contagion channel of systemic risk. Based on sectoral structures of commercial banks’ business loans in China from 2009 to 2022, we show increased sectoral similarity after China’s economic stimulus in 2008 and during the COVID-19 lockdown. Employing QAP correlations, we also find loan similarity is associated with the differences in bank locations and several financial indicators. The relationships between business loan similarity and banks’ risk profiles are investigated in panel regressions. We find that loan similarity is negatively related to individual risks and systemic vulnerability. It also leads to higher contribution to systemic risk by delevering pressure and fire-sale spillovers, providing evidence on a negative externality. The dynamics of the negative externality of loan similarity are also examined. To the best of our knowledge, it is the first study to provide a thorough analysis on the sectoral similarity of commercial banks’ business loans in the Chinese context.