Geopolitical risk and systemic risk in the European banking system

This paper investigates how banks' exposure to geopolitical risks in the foreign countries where they operate affects systemic risk in the European banking sector. Using a quarterly panel of 229 listed European banks from 2000Q1 to 2023Q4, we construct a novel bank-level measure combining Caldara and Iacoviello's (2022) country-specific GPR indices with banks' revenue shares across 44 countries. We find that greater exposure to foreign GPR significantly increases systemic risk, as measured by ΔCoVaR. Our results reveal that larger and Euro-area banks are particularly vulnerable, underscoring the importance of incorporating foreign GPR into macroprudential supervision and stress-testing frameworks.