The Effects of the COVID-19 Pandemic Through the Lens of the CDS Spreads

In this paper we are analysing the impact of the general lockdown meas-ures imposed in Italy in the context of the COVID-19 pandemic on European banks’ CDS spreads. Compared to the impact of the COVID-19 pandemic on sovereign risk, we find little evidence of increased bank risk following the event. However, investors’ reaction was clearly negative in longer time frames. In addition, we quantify the feedback loop be-tween sovereign and bank risk and document an increased interconnectedness between sovereigns and banks during the current health crisis, however with a smaller magnitude comparing to the sovereign debt crisis. Banks are now more resilient to shocks, being a direct consequence of the post-crisis regulator y framework.