7 The increase in the cost of wholesale funding has also partially affected banks in other European countries. According to the BIS, there are, broadly, four channels through which sovereign risk affect banks’ funding costs, given the pervasive role of government debt in the financial system. i.
First, losses associated with government debt weaken balance sheets of banks making funding more costly and difficult to obtain. ii. Second, higher sovereign risks reduce the value of the collateral that banks can use to raise wholesale funding and central bank liquidity. iii.