This paper investigates interbank market fragmentation that results from the bank-sovereign risk nexus. We focus on the Italian market fragmentation during the post-Lehman and sovereign debt crisis era. 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 market fragmentation in rate on the e-MID interbank market data. We find that the bank-sovereign nexus is a signicant 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.
Money market fragmentation sovereign risk sovereign-bank spillover contagion bank regulation