Abstract: Clarifying the contagious path of systemic risks and the influencing factors on the banking system stability under the fire sale is of great significance for maintaining national financial security. Based on regulatory constraints and individual rationality, this paper establishes a Multi-Distribution Fire-Sale model (MD-FS) to unify external shocks, fire sale, systemic risks, and system stability into the same theoretical framework. It also investigates the micro generation mechanism of systemic risks and the factors influencing system stability in China’s banking industry with the data of the balance sheet of China’s banking industry from 2007 to 2021. The findings show that, firstly, the sensitivity of China’s banking industry to the fire sale is significantly different under heterogeneous external shocks. Among them, the response to the fire sale under small shocks is rapid, while the response to the fire sale under large shocks is slow. Secondly, the generation mechanism of the banking systemic risks exhibits consistency under heterogeneous shocks. The external shocks are the trigger for the fire sale, while the direct fire-sale losses and the fire-sale contagion losses are the main components of the systemic risks. Thirdly, financial upward clustering, financial downward clustering, and bank capital have a significant impact on the stability of the banking system, and their interaction determines the stability of the banking system. Therefore, the regulatory authorities need to further establish a dynamic pressure system, encourage differentiated banking operations, enhance capital retention, and reasonably guide the fire-sale expectation of banks, thereby enhancing the stability of the banking system and maintaining national financial security.

Key words: discounted sale, systemic risk, banking system stability, MD-FS