Does Natural Gas Matter for Financial Stability? A SVAR-X Analysis on the European Financial System and Financial Intermediaries

Motivated by recent events that have unsettled the energy sector and consequently affected financial systems, we employ a vector autoregressive model with exogenous variables and contemporaneous restrictions (SVAR-X) to investigate how natural gas demand and supply shocks influence stress levels in the European Union (EU) financial system and its financial intermediaries sector. Our analysis reveals that natural gas supply conditions have a significant impact on the stress levels of the entire European financial market. However, the effect on financial intermediaries is less pronounced and only marginally significant. In contrast, the price of natural gas has minimal and statistically insignificant effects on the systemic stability of both financial intermediaries and the financial sector as a whole. Furthermore, we identify natural gas supply as a primary driver of uncertainty transmission, particularly notable between 2018 and 2021. These findings highlight the importance for the EU to prioritize policies that enhance energy supply security, rather than focusing on controlling energy-commodity prices, to ensure greater financial stability.