BIS working paper says sovereign‑bank “doom loop” has widened to include nonbank financial institutions

A new Bank for International Settlements working paper argues that one of the best-known fault lines in finance has changed shape: the old sovereign-bank “doom loop” has widened into a three-way nexus linking governments, banks and non-bank financial institutions.

The paper’s central finding is that banks’ direct holdings of sovereign debt now explain less of the co-movement between bank risk and sovereign risk than they once did. In recent years, the authors say, banks’ links to non-bank financial institutions, or NBFIs, have become a more important channel.

That matters because sovereign debt has climbed in many major economies, while NBFIs such as asset managers, hedge funds, insurers and other nonbank investors have taken on a larger role in sovereign bond markets. The shift suggests a core financial-stability risk may no longer run mainly through banks owning government bonds outright, but increasingly through the ties between banks and leveraged nonbank investors.

“This paper documents that the traditional sovereign-bank nexus has morphed into a broader nexus that now also includes non-bank financial institutions (NBFIs): the sovereign-bank-NBFI nexus,” the BIS said on its working-paper page.

The paper, “The evolving nexus: sovereigns, banks and NBFIs,” was published by the BIS on July 16 as Working Paper No. 1369. The PDF is dated “This version: July 14, 2026.” Its authors are Stefan Avdjiev and Bryan Hardy of the BIS and Maximilian Jager of Frankfurt School of Finance & Management. The paper is analytical research, not a regulatory decision or market intervention, and it says the views are those of the authors, not necessarily the BIS or its member central banks.

Its main findings run in three parts. First, “We find that banks’ direct sovereign exposures have recently become less important in explaining the co-movement between bank and sovereign risk,” the abstract says. Second, banks’ exposures to NBFIs — measured through exposures to the financial sector and other NBFI proxies — have become a significant determinant of bank-sovereign risk co-movement. Third, NBFIs’ own holdings of sovereign debt have become an important driver of the co-movement between NBFI risk and sovereign risk.

The authors identify a break around 2016. Before then, the traditional sovereign-bank link was stronger. From 2016 onward, bank exposures to the financial sector and to NBFIs became more important in explaining why bank and sovereign risks move together.

The evidence is broad but not universal. For bank-level analysis, the paper uses European Banking Authority exposure data from the first quarter of 2012 through the second quarter of 2024, covering 213 banks headquartered in 29 countries. When that dataset is matched with Markit credit default swap, or CDS, data — a market measure of perceived default risk — the sample falls to 65 banks in 16 countries. The country-level analysis uses BIS international banking statistics from the first quarter of 2014 through the second quarter of 2025. For the NBFI-sovereign analysis, the paper uses an 11-country sample with NBFI-sector CDS estimates from the first quarter of 2004 through the third quarter of 2024.

The backdrop is the euro area sovereign-debt crisis of 2010-12, when weak governments and weak banks fed each other’s stress. Banks held sovereign bonds, and doubts about one side quickly infected the other, giving rise to the “doom loop” label.

The paper argues that today’s market structure is more complex. NBFIs can use leverage to trade sovereign bonds, often with bank funding such as repurchase agreements, or repo. In that setup, stress in sovereign debt can hit NBFIs, trigger deleveraging or fire sales, and feed back into both banks and government bond markets.

The BIS paper does not announce new policy. But it adds to a wider 2025-26 financial-stability debate, also highlighted in work by the BIS, the European Central Bank and the Bank of England, over how a bigger nonbank sector could amplify stress in sovereign debt markets.