Interconnectivity between Sovereigns and the Banking Sector in the European Union
Cecilia Ciocirlan* and Andreea Cretulescu*ABSTRACT. The European sovereign debt crisis altered investment patterns, prompting banks to withdraw assets from foreign banks. These shifts have important implications for both sovereigns and banks. While defining the causality between sovereign bond holdings and crises or their risk exposure is challenging, various empirical studies have assessed the interconnections between these two sectors. This paper examines the interconnectivity between banking sector CDS and sovereign CDS, including Central and Eastern Europe. The analysis reveals that banks and countries within the GIIPS (Greece, Italy, Ireland, Portugal, and Spain) group are the main transmitters of risk. Despite this, the propagation of risks between states and banks appears to be well-managed. Connectivity and risk transmission vary across different periods, with measures from 2011 to 2013 focusing on stabilization or reducing connectivity, while 2014 to 2016 exhibit higher and more frequent variations in connectivity.
JEL codes: E58; G24
Keywords: sovereigns; credit default swaps; banking sector; crises; emerging markets; vector autoregressive model
How to cite: Ciocirlan, C., and Cretulescu, A. (2024). “Interconnectivity between Sovereigns and the Banking Sector in the European Union,” Economics, Management, and Financial Markets 19(4): 9–22. doi: 10.22381/emfm19420241.
Received 12 June 2024 • Received in revised form 22 June 2024
Accepted 25 June 2024 • Available online 10 July 2024