The Bank for International Settlements has published a working paper concluding that the traditional sovereign-bank nexus has broadened into a sovereign-bank-NBFI nexus. Using European bank-level data and global country-level data, the paper finds that banks' direct sovereign debt exposures have become less important in explaining the co-movement between bank and sovereign risk, while banks' exposures to non-bank financial institutions have become a significant transmission channel, particularly in the more recent part of the sample and for riskier sovereigns. The analysis finds that before 2016, higher bank exposure to risky sovereign debt was a strong driver of bank-sovereign risk co-movement, especially in European periphery countries, but that relationship weakened materially after 2016. Over the same period, exposures to the financial sector and, in the aggregate data, directly to NBFIs became more important determinants of bank-sovereign risk co-movement. The paper also finds that NBFIs' own sovereign debt holdings increasingly drive co-movement between NBFI and sovereign risk, supporting the view that sovereign stress now propagates through a triangular set of links among sovereigns, banks and NBFIs. It associates that shift with the larger role of NBFIs in sovereign bond markets and their tighter links with banks through funding, collateral and liquidity channels.
Bank for International Settlements2026-07-16
Bank for International Settlements working paper finds sovereign-bank risk transmission increasingly runs through NBFIs
The Bank for International Settlements has published a working paper finding that the traditional sovereign-bank nexus has expanded to include non-bank financial institutions. It says banks' direct sovereign exposures now explain less of bank-sovereign risk co-movement, while exposures to NBFIs have become a more important channel, especially for riskier sovereigns. The paper also finds NBFIs' sovereign debt holdings increasingly drive NBFI-sovereign risk co-movement.