The interconnectedness of European Banking and Shadow Banking for sustainable development goals: Insights from a network GVAR model

Abstract

The goal of this study is to examine the interdependencies between the banking sector and shadow banking sector in selected European economies through the lens of sustainable development. Using a node-theoretic structure and a network GVAR model, we investigate the relationship between these sectors in a Sustainable Development Goals (SDGs) framework. With this in mind, we examine the interlinkages between the various economies, using a network GVAR model so as to examine the potential dominance of some entities in the system. We conclude that in Europe there are two important financial systems operating simultaneously: one is the European system, where Germany plays a leading role, and the other is the United Kingdom. Analytically, a shock to the banking sector of the European economies will have an impact on the shadow banking sector of the other European economies, whereas shocks to the shadow banking assets of the individual European economies will not have a statistically significant impact on the banking assets of the other European countries. Moreover, shocks in the British banking system significantly impact the European shadow banking assets, while shocks in the shadow banking assets of European member states do not significantly affect the British GDP, suggesting the importance of cross-border collaborations in SDG efforts. By exploring the interdependencies between European banking and shadow banking sectors, this study contributes to the understanding of how financial systems can influence sustainable development. The findings emphasize the significance of fostering innovation across borders and leveraging international interactions to achieve the SDGs.