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Definition

This term refers to the relationship between commercial banks and the government of a country and more especially the exposure or risk of both commercial banks and governments because of their inter-relationships. This risk comes about in three ways - (1) Commercial banks usually carry a considerable amount of the government's debt, usually in the form of treasury bills of various maturities. (2) Commercial banks are usually covered by a government guarantee to a greater or lesser extent. This can be seen in South Africa in the case of African Bank Investments Limited (ABIL) where the Reserve Bank had to intervene to ensure that depositors and other investors in the bank did not lose their money when it collapsed. (3) Commercial banks and governments are both directly put at risk by the health of the economy within which they operate. In South Africa the commercial banks have very solid solvency ratios which makes their exposure to risk far less in a crisis such as the COVID-19 pandemic. The financial health of commercial banks and governments is inter-twined in what has become known as the "sovereign bank nexus". In February 2022, the International Monetary Fund (IMF) in its Financial System Stability Assessment (FSSA) warned that following the pandemic South African commercial banks were holding too much sovereign debt probably as a result of the country losing its investment grade rating which resulted in fewer overseas investors.

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