Does Quantitative Easing mitigate the Sovereign-Bank Nexus?

The credit risk of the sovereign affects the financial health of its banking sector and vice versa, creating an adverse feedback loop known as "sovereign-bank nexus". We show that Quantitative Easing can effectively mitigate the sovereign-bank nexus. Our results indicate that the ECB's Public Sector Purchase Programme reduced the co-movement of sovereign and bank credit risk by almost 80%. The mitigation is driven by the euro area periphery and works through three channels: (i) a reduction in government bond holdings of banks, (ii) an increase of government bond prices, and (iii) an increase inexcess liquidity holdings of banks.