Bank-sovereign ties against interbank market integration: the case of the Italian segment

This paper investigates interbank market fragmentation that results from the bank–sovereign risk nexus. We focus on the Italian market fragmentation before and within the European sovereign debt crisis. By using Italian bank and GIPSI country CDS spread changes, we suggest a new measure of sovereign/bank spillovers, based on partial correlations. Then, we examine the relationship between the sovereign-to-banks contagion risk variable and interbank market fragmentation in rates using the e-MID market data. We find that the bank–sovereign nexus is a significant source of fragmentation during the most acute phase of the sovereign debt crisis. Our findings suggest that even if the home country/bank ties impact interbank market integration seriously, the risk from other distressed countries is not negligible