Sovereign risk spillovers drive bank funding crisis during European debt crisis.
The article examines how the European debt crisis affected banks in 14 European countries. By analyzing changes in sovereign and bank CDS spreads, the researchers found that increased sovereign risk led to higher volatility in bank CDS spreads. This, in turn, negatively impacted some banks' funding conditions due to higher domestic sovereign default risk. The study suggests that sovereign CDS spreads can predict changes in bank CDS spreads, but the effects vary depending on the country and financial institution size.