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Assessing the sovereign-bank interdependence in Eurozone core countries

Salvatore Capasso (Department of Human and Social Sciences, CNR, Rome, Italy) (Department of Business and Economic Studies, University of Naples Parthenope, Naples, Italy) (CSEF, University of Naples Federico II, Naples, Italy)
Marcella D’Uva (Department of Business and Economic Studies, University of Naples Parthenope, Naples, Italy)
Cristiana Fiorelli (Department of Economics and Law, University of Rome La Sapienza, Rome, Italy)
Oreste Napolitano (Department of Business and Economic Studies, University of Naples Parthenope, Naples, Italy)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 25 September 2024

33

Abstract

Purpose

The aim of this study is to determine whether financial contagion is transmitted through macroeconomic fundamentals, not only in weaker countries but also in strong European Monetary Union (EMU) economies.

Design/methodology/approach

This study conducts, for the first time, an analysis of the spillover effects resulting from a shock to Italian sovereign risk on the banking systems and credit default swaps (CDS) of five EMU core countries during the period 2012–2018, employing a global vector autoregressive (GVAR) approach. Spatial interdependence is quantified through the cross-country distance in the deficit-to-gross domestic product (GDP) ratio.

Findings

The findings reveal the existence of both a “doom-loop” between banks and sovereign bonds and a “bad neighbours” effect. The susceptibility to spillovers is notably higher in economies displaying a larger deficit-to-GDP ratio. These results suggest that differences in fiscal fundamentals could drive financial contagion even within core countries, indicating a need for evaluating the stability of the entire EMU system.

Originality/value

Unlike previous studies, we utilize the cross-country distance in the deficit-to-GDP ratio as a measure of fiscal fundamentals distance for the countries under investigation. To the best of our knowledge, our study is the first to analyse this matter in EMU core countries using a GVAR methodology.

Keywords

Acknowledgements

In memory of our dearest friend Oreste Napolitano, who made significant contributions to this work.

Citation

Capasso, S., D’Uva, M., Fiorelli, C. and Napolitano, O. (2024), "Assessing the sovereign-bank interdependence in Eurozone core countries", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-01-2024-0050

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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