Research Briefing | Jun 28, 2022

Where bank-sovereign embraces could turn poisonous

We use our sovereign risk tool (SRT) and our new banking sector risk tool (BSRT) to identify which economies are most vulnerable to a dual sovereign-banking crisis, and why.

In normal (and even slightly stressful) circumstances, the bank-sovereign embrace can stabilise the economic and financial system. However this embrace can become poisonous. History is littered with the carcasses of banks and sovereigns that dragged each other down as finance dried up.

What you will learn:

  • Overall banking sector risks have receded post-Covid and now stand close to historic averages, according to our newly developed banking sector risk tool, which considers balance sheet and economic risks. Risks remain higher for advanced economies (AEs) than emerging and frontier markets (EMs and FMs).
  • Risks of the embrace turning poisonous are much higher for EMs. Greece, France, and Belgium are the only AEs with levels of banking and sovereign risk above global averages; by contrast, 17 EMs are in this category, including all the BRICs with the exception of China.
  • It’s the prospect of distressed sovereigns dragging down their domestic banking systems that concerns us most. We identify an extraordinarily high number (24) of EM sovereigns currently in or bordering on stress.

Back to Resource Hub

Related posts


Falling US supply chain stress augurs for lower inflation

Supply chain stress continued to ease in February despite stronger-than-expected economic growth. Supply chains could return to pre-pandemic conditions by the end of this year if our tracker's current trajectory is maintained, as we anticipate.

Find Out More


US bank funding turmoil drags down CRE outlook

The recent turmoil in US bank funding will likely feed into tighter lending standards to commercial property, dampening the outlook for capital values even further than we had expected. We now expect all property capital values to fall by 10% in 2023 and 5% in 2024.

Find Out More


Banking crises matter for growth. Policy responses are crucial

The failure of Silicon Valley Bank and other stresses in the global banking system have triggered a sharp repricing in financial markets, with stocks and bond yields sliding.

Find Out More