BANKING INSTABILITY AND CONSEQUENCES IN THE SOVEREIGN RISK CONTEXT - EUROPEAN ECONOMIES

Banking instability, as a result of the sovereign risk emergence, triggered, over time, the need for a detailed diagnosis by decision-makers from the monetary authorities, being a theme of permanent relevance and complexity among economic policies. The main issue is related to the existence of a very close, dependent link between the probability of banking instability and sovereign risk. The rigor of the issue requires an in-depth analysis; therefore, this paper aims to capture aspects of micro and macroprudential, based on a panel data set for European Union countries, starting from 2005. In this context, the research identifies liquidity and solvency as the main vulnerabilities to macroeconomic stability, based on its objectives. This is achieved through a micro-level analysis of credit institutions and the use of macroprudential assessment tools, applying multivariate regression and vector autoregressive models, and complemented by unifactorial and multifactorial resilience scenarios to extreme but plausible events. Another objective is to develop a diagnostic framework that enables the assessment of banking performance sensitivity to government bond yield dynamics through both market and credit risk channels. The importance of this research and the estimated results lie in identifying the negative impact of rising government bond yields on banking profitability, particularly on capital adequacy. On the other hand, the originality of this research lies in the estimates that contribute to shaping a set of policy options within the economic policy mix and to formulating proposals for preventive measures aimed at mitigating systemic risks arising from the interaction between sovereign risk and the likelihood of banking instability.