Interconnectedness in the European Financial System: Is the Worst Behind Us?

We discuss the role of interconnectedness in the assessment of systemic risk. As the financial crises of recent decades have shown, measuring systemic risk represents a strategic challenge, both for governments as well for regulatory and supervisory bodies. Recent studies on this topic show that interconnectedness within financial systems, that is to say the way in which economic agents interact, is a key element of systemic risk. On the basis of an econometric study, we show the dynamics of interconnectedness in the European financial system between 2005 and 2018. We use the approach proposed by Kindleberger (1978) and Minsky (1982) to analyze the role of interconnection in a financial crisis. The interconnection spikes observed during the subprime crisis and the European sovereign crisis attest to its importance. However, whether interconnection is a precursor of a systemic crisis or a consequence remains unclear.