Does Sovereign Risk Impact Banking Risk in the Eurozone?
This paper studies the impact of sovereign risk on Eurozone banking risk during a novel crisis such as the COVID-19 pandemic. Spillover effects on volatility are identified using Granger causality tests, a spillover matrix, and BEKK-GARCH models. The results confirm that an increase in Eurozone sovereign risk has impacted banking risk in Eurozone and that sovereign risk in the countries of the Eurozone periphery is being transmitted to banking risk in the core countries during the current crisis. These conclusions are very important for risk management and the design and monitoring of Eurozone financial policies.