Dynamic Spatial Treatment Effects and Network Fragility: Theory and Evidence from European Banking

Tatsuru Kikuchi

Papers from arXiv.org

Abstract: This paper develops and empirically implements a continuous functional framework for analyzing systemic risk in financial networks, building on the dynamic spatial treatment effect methodology established in our previous studies. We extend the Navier-Stokes-based approach from our previous studies to characterize contagion dynamics in the European banking system through the spectral properties of network evolution operators. Using high-quality bilateral exposure data from the European Banking Authority Transparency Exercise (2014-2023), we estimate the causal impact of the COVID-19 pandemic on network fragility using spatial difference-in-differences methods adapted from our previous studies. Our empirical analysis reveals that COVID-19 elevated network fragility, measured by the algebraic connectivity $\lambda_2$ of the system Laplacian, by 26.9% above pre-pandemic levels (95% CI: [7.4%, 46.5%], p

Date: 2025-10
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