The extreme risk connectedness of the new financial system: European evidence

Abstract

The paper empirically analyses the tail risk connectedness between FinTech and the banking sector in the European context over 2015–2022. For this purpose, we use the Tail-Event driven NETworks (TENET) risk model, i.e., we can capture the behaviour of extreme (negative and positive) risk spillover within the financial system. The results highlight how most tail risk spillovers are from banks to FinTech firms. Also, the findings suggest that the spillovers of cross-sector tail risk are more significant in downside (bearish) risk conditions than in upside (bullish) one. We find evidence of an asymmetric effect of extreme risk spillover to the real economy. Finally, we evaluate the monetary policy’s impact on extreme risk. Our findings highlight the importance of closer monitoring risk spillover between FinTech institutions and the European banking system to maintain financial stability.