Steps underway to address sovereign-bank nexus: CB 

The Central Bank has said that steps are underway to address what is referred to as sovereign-bank nexus,’where the excesses or vulnerabilities of one sector could have adverse implications on the other causing instability.
Releasing the financial system stability review for the period ending September 2023, the Central Bank disclosed that the measures are being taken towards this end. 

“Efforts are underway to address the sovereign-bank nexus through policy reforms, aiming to rectify financial intermediation imbalances in the medium to long run,” the Central Bank said. 
Sovereign-bank nexus refers to the close relationship or interdependence between a country’s government and its banking sector.

The economic crisis and the resulting declaration to suspend debt payments by the government highlighted the risks one sector has on the other where the debt default had a severe bearing on banks’ balance sheets. 
Banks allocated massive amounts as provisions from their earnings on the bonds they hold of the government, specially on the foreign denominated ones. 

The conditions exacerbated when the crisis and the resulting elevated interest rates pushed scores of borrowers to default on their loans. This resulted in sharply higher additional provisions for possible loan losses.
The Central Bank last year decided to leave out the banking sector from the domestic debt optimisation programme to prevent the sector from assuming any more stress.