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Are banking shocks contagious? Evidence from the eurozone
journal contributionposted on 2023-05-20, 15:36 authored by Dungey, M, Flavin, TJ, Lagoa-Varela, D
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.
Publication titleJournal of Banking and Finance
PublisherElsevier Science Bv
Place of publicationPo Box 211, Amsterdam, Netherlands, 1000 Ae
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