Title: East-West Risk Connectedness in the European Banking Sector

Authors: 
András Bethlendi - Budapest University of Technology and Economics
Miléna Dóra Szabó - Budapest University of Technology and Economics

Abstract:

This study examines the risk spillover dynamics between banks in Central and Eastern Europe (CEE) and Western Europe (WE) across 30 banking groups from 2014 to 2023, segmented into three distinct periods: pre-COVID-19, during COVID-19, and the Russo-Ukrainian conflict. The key contribution of the paper lies in combining a cross-regional perspective with a longer time horizon, covering major shocks. Utilizing the Diebold-Yilmaz interconnectedness index model, we analyze volatilities derived from daily stock prices to identify key players in the transmission and absorption of financial shocks. Our findings, supported by existing literature, reveal a strong interconnectedness between the two parts of Europe. WE banks are more likely to be shock transmitters, while CEE banks play the role of shock receivers. However, during the Russo-Ukrainian war, CEE banks appeared more among the net transmitting banks. Although one of the main features of the CEE financial system is its dependence on WE, a bank nationalism has also emerged in some countries. This may nuance the dynamics of CEE financial stability: reducing the magnitude of WE shock, but in the case of CEE-specific shocks, the possibility of risk transfer (dispersion) is also weakened.

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