When and for Whom Does the Sovereign-Bank Nexus Matter? Evidence from Post-Crisis Europe

Charlotte Hoopes, Pinar Uysal and Ilknur Zer
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Ilknur Zer: https://www.federalreserve.gov/econres/ilknur-zer.htm

No 1448, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study whether sovereign risk continues to affect banks a decade after Europe began reshaping its financial architecture. Combining daily bank and sovereign credit default swap spreads with supervisory data on banks' domestic sovereign portfolios, we show that the sovereign-bank relationship remains economically meaningful but is highly conditional. Banks with larger sovereign holdings respond more sharply to home-sovereign risk, and this amplification is substantially stronger for mark-to-market than amortized-cost exposures, consistent with more immediate recognition of valuation losses. Sovereign-to-bank transmission is stronger for less-capitalized, wholesale-funded, and peripheral banks, during periods of elevated market uncertainty, and when the home sovereign has less fiscal capacity. The policy reforms aimed at weakening the sovereignbank relationship only managed to reduce the extent of the link, but not eliminate it.

Keywords: sovereign-bank nexus; sovereign exposures; bank risk; fiscal space (search for similar items in EconPapers)
JEL-codes: G15 G21 G28 (search for similar items in EconPapers)
Pages: 30 p.
Date: 2026-10-30
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:103994

DOI: 10.17016/IFDP.2026.1448

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