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

Tatsuru Kikuchi

MPRA Paper from University Library of Munich, Germany

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 \citet{kikuchi2024dynamical}. We extend the Navier-Stokes-based approach from \citet{kikuchi2024navier} 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 \citet{kikuchi2024dynamical}. 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$

Keywords: inancial networks; Systemic risk; Navier-Stokes dynamics; Spatial treatment effects; Network contagion; Banking regulation; COVID-19 (search for similar items in EconPapers)
JEL-codes: C31 C63 E44 G01 G21 G28 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-eec, nep-eur and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:126721

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