Is there Inter-Regional Systemic Risk Contagion? An Investigation of Inter-Regional Systemic Risk Spillover Effects using the ESS-indicator and Bank CDS Spreads

Abstract

During the 2007-2009 financial crisis certain events in the American financial system affected financial markets around the globe. Moreover, since the onset of the euro zone sovereign debt crisis, the systemic risk in Europe also appeared to affect the banking sector risk in other regions. While both effects are mentioned frequently in the public discourse on banking sector risk contagion and regulation, a scientific examination of these inter-regional contagion effects is to the best of our knowledge not available. In this paper we fill this gap and analyze the inter-regional systemic risk contagion effects between the regional relative expected systemic shortfall (ESS) indicator and alternatively the regional bank CDS spreads of the American, Asia-Pacific, European as well as the Middle East and Russia sub-samples in Lahmann/Kaserer (2011) by means of Granger-causality tests and impulse response analysis in vector autoregressive frameworks during four sub-periods between October 2005 and April 2011.We find that during the financial crisis period the systemic risk in America leads the systemic risk in other regions and during the euro zone sovereign debt crisis period the impact of the European systemic risk on the banking sectors in other regions is more pronounced. Moreover, additional lead-lag relationships are observed.