Are banking shocks contagious? Evidence from the eurozone

Mardi Dungey, Thomas Flavin and Dolores Lagoa-Varela

Journal of Banking & Finance, 2020, vol. 112, issue C

Abstract: We analyze the transmission of shocks between global banking, domestic banking and the non-financial sector for eleven Eurozone countries. Using a Markov-switching Factor augmented VAR model, we distinguish between contagion, interdependence and decoupling as shock transmission mechanisms during the ‘crisis’ regime. Contagion played a role in propagating global banking shocks to the banking sectors of smaller states, exacerbating the crisis in these countries. In contrast, the non-financial sectors suffered little contagion from either external or domestic banking shocks, and generally managed to decouple from the banking industry – indicative of being able to source alternative financing and shield themselves from the crisis. However, shocks originating in the non-financial sector trigger contagious effects for both the domestic banking sector and, to a lesser extent global banking, thereby acting as a source of fragility for the financial sector during crisis periods.

Keywords: Contagion; Shock transmission; Banking crises (search for similar items in EconPapers)
JEL-codes: C32 G01 G21 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (19)

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Working Paper: Are Banking Shocks Contagious? Evidence from the Eurozone (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:112:y:2020:i:c:s0378426618301572

DOI: 10.1016/j.jbankfin.2018.07.010

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