The Role of Uncertainty in the Scandinavian Banking Sector

Abstract: In this thesis we analyse the impact of uncertainty shocks in the Scandinavian banking sector. We apply the spillover approach developed by Diebold and Yilmaz (2009; 2012; 2014), followed by network analysis. Furthermore, the dynamics of uncertainty shocks are examined by applying a quantile regression approach. We study the effects of financial uncertainty, economic policy uncertainty, geopolitical risk and housing market uncertainty on the seven banks Swedbank, Nordea, SEB, Svenska Handelsbanken, DNB, Danske Bank and Jyske Bank. We study these uncertainties on global, regional and local level between 2005 and 2018. We find that the Swedish banks are greater emitters of contagion, compared to the Norwegian and Danish banks, where SEB and Nordea are the banks emitting and receiving the most spillovers. Moreover, the connectedness within the banking sector tend to increase in times of heightened uncertainty, such as during the Global Financial Crisis and the European Sovereign Debt Crisis. Global financial uncertainty is shown to affect the Scandinavian banks the most, followed by regional and local financial uncertainty. The same pattern can be seen for economic policy uncertainty, although at lower levels of spillovers. Reversely, housing market uncertainty is seen to increase going from global, regional to local, where the impact of local housing market uncertainty has a considerable amount of spillovers to the Scandinavian banks. Geopolitical risk is shown to have limited spillovers to the Scandinavian banks. The result of the quantile regressions suggests that financial uncertainty is affecting the banks’ returns negatively during bearish market conditions, whilst the relationship is positive during bullish market conditions. Moreover, we find that financial uncertainty is a quicker transmitter of spillovers than housing market uncertainty. Finally, we conclude that uncertainty shocks affecting the Scandinavian banks negatively tend to take effect instantaneously, while the effects of positive shocks are delayed.