Key Macroeconomic Drivers of Bank Capital Stability Amid Crises and War

Abstract

This paper conducts a comprehensive cross-sectional analysis of systemic risk and its influence on the total capital ratios (TCRs) of 120 systemically important European banks. By combining panel models with an asymmetric ΔCoVaR-based systemic risk measurement, the study explores the complex interplay of 50 exogenous and endogenous variables during critical periods of financial turbulence, including the European public debt crisis, Brexit, the COVID-19 pandemic, and the war in Ukraine. The findings offer valuable macroprudential insights, revealing that systemic risk exerts a significant positive effect on TCRs in the periods leading up to crises, while having a strong negative impact in their aftermath. Additionally, systemic risk is shown to alter the effects of key macroeconomic indicators (GDP growth, unemployment, and public debt) reversing their influence on TCRs. The interactive dynamics between systemic risk and TCRs are found to be systematic, with some time-varying and crisis-specific effects. Crucially, the analysis suggests that policy measures implemented over the past 15 years may have obscured the growing fragility of the European banking sector. Finally, the study provides empirical evidence that the war in Ukraine affects banks’ TCRs in a manner consistent with previous crises, underscoring the persistent vulnerabilities of the financial system in the face of geopolitical and economic shocks.