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Are banking shocks contagious? Evidence from the eurozone

Dungey, M ORCID: 0000-0003-0074-2314, Flavin, TJ and Lagoa-Varela, D 2020 , 'Are banking shocks contagious? Evidence from the eurozone' , Journal of Banking and Finance, vol. 112 , pp. 1-17 , doi: 10.1016/j.jbankfin.2018.07.010.

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We analyze the transmission of shocks between global banking, domestic banking and the non-financialsector for eleven Eurozone countries. Using a Markov-switching Factor augmented VAR model, we distinguish between contagion, interdependence and decoupling as shock transmission mechanisms duringthe ‘crisis’ regime. Contagion played a role in propagating global banking shocks to the banking sectors ofsmaller 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 fromthe banking industry – indicative of being able to source alternative financing and shield themselves fromthe crisis. However, shocks originating in the non-financial sector trigger contagious effects for both thedomestic banking sector and, to a lesser extent global banking, thereby acting as a source of fragility forthe financial sector during crisis periods.

Item Type: Article
Authors/Creators:Dungey, M and Flavin, TJ and Lagoa-Varela, D
Keywords: contagion, shock transmission, banking crises
Journal or Publication Title: Journal of Banking and Finance
Publisher: Elsevier Science Bv
ISSN: 0378-4266
DOI / ID Number: 10.1016/j.jbankfin.2018.07.010
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© 2018 Elsevier B.V. All rights reserved.

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