Abstract
This paper shows how a measure of bank-sovereign contagion can be extracted from CDS spreads using conditional Copula functions. I estimate the probability of a European bank to experience extreme upward co-movements in CDS spreads together with its home sovereign. Two main results are obtained. First, bank-sovereign contagion is shown to vary strongly over time and across countries. Contagion is higher when the sovereign suffers from poor public finances. Second, banks with higher exposures to their home sovereign disproportionately benefit from sovereign-bank contagion in that they exhibit significantly lower CDS spreads. The evidence is supportive of a private-to-public risk transfer.
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