Impact of the COVID-19 Pandemic on Systemic Risk of Gulf Cooperation Council Banking

Abstract

Motivated by a recognition of the increased vulnerability of the banking sector to the COVID-19 pandemic, we examine market-based systemic risk and connectedness in the banking sector of Gulf Cooperation Council member countries, which include Bahrain, Kuwait, the Kingdom of Saudi Arabia (KSA), Oman, Qatar, and the United Arab Emirates (UAE). First, we apply conditional value-at-risk and marginal expected shortfall to measure tail risk between banks. These measures increased the most for the UAE, whereas Oman was almost unaffected. Second, to analyze the spillover effects of financial systemic risk, we apply the Granger-causality network method. The results reveal a remarkable rise in the percentage and number of significant Granger-causality links between banks for Kuwait and KSA during the pandemic. Oman and Qatar experienced an unnoticeable increase in bank return connectedness. Furthermore, the study identifies the bank characteristics that provide a shelter from the systemic shocks of the pandemic. The study findings indicate that income diversification is the most important variable for enhancing bank stability amid the pandemic. Our findings provide policy-related implications for understanding and mitigating risk shock transmission and the containment of systemic financial risk, in addition to multiple future lines of research.