Spillover effects between energy uncertainty and financial risk in the Eurozone banking sector

This paper investigates the connection between energy uncertainty and banking credit risk within the Eurozone. To analyze this relationship, we first apply a Bayesian time-varying VAR model to examine how shocks in energy uncertainty influence financial risk. Next, we use the impulse response function to assess how these shocks propagate through the banking sector. Further, long-run Granger causality is employed to investigate the causal pathways of shock transmission. Our empirical findings show clear patterns: banking credit risk increases in response to energy uncertainty shocks. Over time, these shocks show a progressively rising impact on credit risk, highlighting the growing influence of energy uncertainty on the spread of financial risk. • We investigate the link between energy uncertainty and banking credit risk in the Eurozone. • We use the Bayesian time-varying VAR model to capture shock dynamics. • We find that banking credit risk rises with energy shocks. • We show that the banking credit risk is a shadow channel to energy shock spillover.