Credit diversification and banking systemic risk

Banks generally enhance their competitiveness through credit diversification. However, credit diversification may trigger serious systemic risk through the effect of fire sales. Using data from the Chinese banking market, we quantify the fire sales of credits and provide empirical evidence for the impact of credit diversification on systemic risk. The results reveal that an increased level of credit diversification promotes systemic risk and is more pronounced among small banks. Both the credit loss and network complexity of individual banks contribute to the impact of credit diversification on systemic risk. Declining economic prospects will also promote credit diversification to cause more systemic risk. However, tight macroprudential regulation helps to mitigate the promotion of credit diversification. These findings provide regulatory insights for systemic risk prevention.