Bank bailouts and bank-sovereign risk contagion channels

•I identify the effects of bank bailouts on default risks of banks and governments.•I measure the bank-sovereign interdependence risk.•Bank rescue packages generate a risk transfer from banks to governments.•I find a stronger stabilization effect of bank bailouts for the US.•The bank-sovereign contagion is more persistent in Europe relative to the US.

Bank bailouts generate risk spillovers between the default risks of banks and governments. This paper quantifies the effects of bank bailouts and measures the interdependence risk between the banking sector and government for the US and six European countries. The approach allows to distinguish two channels of contagion by identifying bailout and sovereign risk shocks and assessing their effects on the default risks of banks and governments. In contrast to Europe, a bailout shock generates a persistent decrease in the default risk of the US banking sector. The bank-sovereign risk contagion is stronger in Europe relative to the US.