The International Monetary Fund has published a Global Financial Stability Note finding that adverse banking-sector shocks can quickly increase sovereign credit risk. Using the March 2023 collapse of Silicon Valley Bank as an exogenous shock, the analysis identifies statistically significant transmission in the United States and 31 other major advanced and emerging market economies, despite no significant average relationship between short-term bank and sovereign credit risk over 2015-23. During the Silicon Valley Bank episode, a 10-basis-point increase in U.S. banks’ one-year credit default swap spreads raised the U.S. sovereign spread by about 4.5 basis points. Across the other economies, the average increase was about 3.5 basis points. Transmission was stronger in countries with higher public debt-to-GDP ratios, greater bank exposure to domestic sovereign debt and less well-capitalized banking systems. The note calls for stronger supervision, crisis management, recovery and resolution planning, and deposit insurance regimes. It also recommends containing fiscal vulnerabilities and monitoring banks’ concentration in domestic sovereign debt, including potential capital surcharges above specified exposure thresholds.
2025-06-05International Monetary Fund
International Monetary Fund finds bank stress raises sovereign credit risk, especially in high-debt economies
The International Monetary Fund finds that banking-sector shocks can quickly raise sovereign credit risk, with stronger transmission in economies with high public debt, substantial bank holdings of domestic sovereign debt and weaker bank capital. During the Silicon Valley Bank collapse, a 10-basis-point rise in bank credit default swap spreads increased sovereign spreads by about 4.5 basis points in the United States and 3.5 basis points across other major economies. The note recommends stronger supervisory and crisis management frameworks, fiscal buffers and controls on concentrated sovereign exposures.