Sovereign and bank CDS spreads: Two sides of the same coin?

We perform an in-depth investigation of the price discovery between sovereign and bank CDS spreads and find that both variables have an important role in the period preceding the financial crisis of 2007-2009. However, during the global financial crisis and the subsequent European sovereign debt crisis, sovereign CDS spreads dominate the price discovery process. Our findings suggest that, especially during crisis periods, sovereign CDS spreads incorporate more timely information on the default probability of European banks than their corresponding bank CDS spreads