In the midst of the unprecedented COVID-19 pandemic crisis, the scope of the current study is to outline the channels of shock propagation across sovereigns under these unprecedent conditions. We use a sample of European countries for a period of twelve years that encompasses the COVID-19 as well as the turbulent period of the European debt crisis. We apply Bayesian Vector Autoregressive techniques to show a dramatic increase in sovereign contagion during the outbreak of the COVID-19 pandemic, even higher than the increase recorded during the European Debt crisis. The result works through government response and containment measures. Extensive and severe detachment from any financial fundamentals is evident. The announcements of fiscal and monetary easing measures have eliminated the tension in the markets. When focusing on the period of the pandemic the impact of the national culture emerges through the channel of collectivism.

We provide a new metric for the systemic importance of banks based on the intensity of spillovers of daily CDS movements. We denote this a bank’s Individual Systemic Risk (ISR). Our novel empirical tool uses Bayesian VAR to address the dimensionality problem in large networks of banks and maps for every pair of banks in the system the shocks that they exchange. We apply this tool to all banks that issue publicly traded CDS contracts among the world’s biggest 150 and identify which of these may trigger instability in the global financial system. Our methodology provides measures that are relatively stable across time, contain persistent information, have strong explanatory power for standard variables of systemic risk, and provided early warning signals in the case study of Deutsche Bank in mid-2016. Using our ISR measure, we demonstrate which bank- and country-specific characteristics are related to bank systemic importance. We find higher systemic importance for banks that are relatively larger, less profitable, have G-SIB status, and are headquartered in economies with fiscally strong sovereigns. We also show that there is a negative relationship between concentration in the domestic banking sector and the systemic importance of a bank. We examine the relationship of ISR to alternative systemic risk metrics.