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We measure the systemic importance of all banks that issue publicly traded CDS contracts among the world's biggest 150. Systemic importance is captured by the intensity of spillovers of daily CDS movements. Our new empirical tool uses Bayesian VAR to address the dimensionality problem and identifies banks that may trigger instability in the global financial system. For the period January 2008 to June 2017, we find the following: A bank's systemic importance is not adequately captured by its size. European banks have been the main source of global systemic risk with strong interconnections to US banks. For the global system, we identify periods of increased interconnections among banks, during which systemic and idiosyncratic shocks are propagated more intensely via the network. Using principal components analysis, we identify a single dominant factor associated with fluctuations in CDS spreads. Individual banks' exposure to this factor is related to their government's ability to support them and to their retail orientation but not to their size.

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We examine the informative value of the 2016 and 2018 supervisory EU stress tests on the basis of the bank stock and CDS abnormal returns they have caused. Our conclusions are based on results from event study analysis and from regressions on the determinants of bank stocks' abnormal returns. We conclude that the 2018 stress test has been comparatively more informative for investors but only for a subgroup of banks based on sovereign debt-ridden and non-Eurozone countries. The robustness of our results is tested by applying an exhaustive set of event study test statistics on abnormal returns generated from both single and Fama-French factor models. The equity Tier I, leverage and profitability ratios are important determinants of abnormal bank stock returns for the same group of countries as in the event study analysis. Non-linear reactions highlight the fact that investors assign varying degrees of importance on the information they get from the stress tested financial ratios. Overall, our results substantiate the claim that the recent EU stress tests have been calibrated towards revealing the weaknesses of the banking sectors of peripheral Eurozone and non-Eurozone countries.