On the Risk-Based Contagion of G7 Banking System and the COVID-19 Pandemic

Abstract

We revisit the discussion on banking system contagion by proposing a risk-based empirical analysis during the current pandemic period. We use daily returns on G7 banking sector indices from January 01, 2015 to December 31, 2019 (pre-pandemic), and from January 01, 2020 to October 16, 2020 (pandemic). Based on the dissimilarities, the pandemic has intensified banking contagion. Frequency-based Granger causality is useful to tell the history of the pass-through of this health crisis across G7 banking sectors. We highlight the increase in the predictive relevance of Italian banking cycles in during the pandemic. VaR ratio analysis, considering 21 possible pairwise combinations with the G7 financial indices, suggests a stronger contagion between banking systems. The greatest contagion is evident in the Italian and French banking systems, countries severely punished by deaths by COVID-19, while we find less contagion between Japan and Germany, countries least affected by the first wave of COVID-19.

Keywords: Absolute risk measures, Wavelet dissimilarities, Frequency-based Granger causality, Value at risk ratio

JEL Classification: F44, G15, C6