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.

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