The Time-Spatial Dimension of Eurozone Banking Systemic Risk

Matteo Foglia and Eliana Angelini
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Eliana Angelini: Department of Economics, “G.d’Annunzio” University of Chieti-Pescara, Viale Pindaro n. 42, 65127 Pescara, Italy

Risks, 2019, vol. 7, issue 3, 1-25

Abstract: In this paper, we measure the systemic risk with a novel methodology, based on a “spatial-temporal” approach. We propose a new bank systemic risk measure to consider the two components of systemic risk: cross-sectional and time dimension. The aim is to highlight the “time-space dynamics” of contagion, i.e., if the CDS spread of bank i depends on the CDS spread of other banks. To do this, we use an advanced spatial econometrics design with a time-varying spatial dependence that can be interpreted as an index of the degree of cross-sectional spillovers. The findings highlight that the Eurozone banks have strong spatial dependence in the evolution of CDS spread, namely the contagion effect is present and persistent. Moreover, we analyse the role of the European Central Bank in managing contagion risk. We find that monetary policy has been effective in reducing systemic risk. However, the results show that systemic risk does not imply a policy intervention, highlighting how financial stability policy is not yet an objective.

Keywords: spatial contagion; systemic risk measure; bank risk-taking; macroprudential policy (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:7:y:2019:i:3:p:75-:d:246287

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