Does sovereign risk impact banking risk in the Eurozone? Evidence from the COVID-19 pandemic

• Published in: Finance research letters Vol. 47; p. 102670
• Main Authors: González-Velasco, Carmen, García-López, Marcos, González-Fernández, Marcos
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.06.2022
• Subjects: Banking risk; BEKK-GARCH models; COVID-19; Sovereign risk; VARX models; COVID-19; BEKK-GARCH models; VARX models; C58; Banking risk; G01; G15; Sovereign risk; G18
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2021.102670

•We analyze the impact of sovereign risk on banking risk in Eurozone during the COVID-19 pandemic.•Sovereign risk has impacted banking risk in Eurozone.•The transmission route is through spillovers to volatility.•There is no evidence that sovereign risk in peripheral countries has impacted in banking risk in core countries.•The impacts of both previous risks are offset. This paper studies the impact of sovereign risk on Eurozone banking risk during a novel crisis such as the COVID-19 pandemic. Spillover effects on volatility are identified using Granger causality tests, a spillover matrix, and BEKK-GARCH models. The results confirm that an increase in Eurozone sovereign risk has impacted banking risk in Eurozone and that there is no evidence that sovereign risk in the countries of the Eurozone periphery is being transmitted to banking risk in the core countries during the crisis. These conclusions are very important for risk management and the design and monitoring of Eurozone financial policies.