Effects on Growth and Inflation of the Unraveling of Systemic Risk in the Euro Area Banking Sector: Lessons from the Financial Crisis

39 Pages Posted: 17 Apr 2020 Last revised: 5 Feb 2021

See all articles by Alain Ntumba Kabundi

Alain Ntumba Kabundi

World Bank

Francisco Nadal De Simone

Universite du Luxembourg - Luxembourg School of Finance; Sacred Heart University - Jack Welsh College of Business

Date Written: January 8, 2021

Abstract

This study extends the work of Kabundi and Nadal De Simone’s (2019) measurement of systemic risk-taking in the euro area banking sector in two interrelated directions. First, it shows that all but one of the estimated systemic risk measures could have signaled with high accuracy the extreme macro-financial instability in the euro area that followed Lehman Brothers’ collapse. Second, the unravelling of systemic risk following a one-standard deviation shock to systemic risk affects GDP growth and inflation negatively with the latter displaying a more pronounced response than the former. There is heterogeneity in the strength of the responses across diverse forms of systemic risk and their time dimension. Systemic risk associated with banks’ interconnectedness and contagion plays a considerable role in depressing economic activity. Short-term systemic risk measures tend to portray stronger effects on output and inflation than their conditional forward counterparts. The systemic risk measures are potential candidates of a macroprudential-policy toolkit for calibrating policy instruments with thresholds that reflect policymakers’ risk preferences.

Keywords: systemic risk, financial stability, non-linearities, FAVAR, monetary policy

JEL Classification: E44, E52, C30, C38, G1

Suggested Citation

Kabundi, Alain Ntumba and Nadal De Simone, Francisco, Effects on Growth and Inflation of the Unraveling of Systemic Risk in the Euro Area Banking Sector: Lessons from the Financial Crisis (January 8, 2021). Available at SSRN: https://ssrn.com/abstract=3565803 or http://dx.doi.org/10.2139/ssrn.3565803

Alain Ntumba Kabundi

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Francisco Nadal De Simone (Contact Author)

Universite du Luxembourg - Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

HOME PAGE: http://https://wwwfr.uni.lu/fdef/luxembourg_school_of_finance

Sacred Heart University - Jack Welsh College of Business ( email )

7, rue Alcide de Gasperi
Luxembourg, CT L-2981
Luxembourg

HOME PAGE: http://www.shu.lu/

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