Is vaccination the cure to the systemic risk? The effect of vaccination on bank systemic stability.

The recent COVID-19 pandemic increased the bank systemic fragility. This paper evaluates the connection between vaccination and the systemic risk. Using sample in the United States and major European countries, I find that COVID-19 vaccination significantly contributes to the stability of the banking sector through decreasing systemic risk on both country-level and bank-level, and the effect is stronger in the US than in Europe. Additional analysis suggests that smaller banks tend to benefit more from vaccination. Furthermore, there exist systematic relationships among the COVID-related variables (pandemic severity, vaccination, government response) and the systemic risk. While vaccination decreases the systemic risk, the pandemic itself and the government response build up the risk. Moreover, the COVID-related variables have mutual effect on one another. Additionally, I obtain three orthogonal components out of the COVID-related variables and similar results ensue using principal component analysis. Lastly, I show that the effect of vaccination on systemic risk is robust to the inclusion of the potential impact of government announcements regarding COVID-19 vaccination.