Are banking shocks contagious? Evidence from the eurozone

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...

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Bibliographic Details
Published in:Journal of banking & finance 2020-03, Vol.112, p.105386, Article 105386
Main Authors: Dungey, Mardi, Flavin, Thomas J., Lagoa-Varela, Dolores
Format: Article
Language:English
Subjects:
Banking crises
Contagion
Shock transmission
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Summary: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.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2018.07.010