This paper studies the impact of cross-border banking integration on the sovereign-bank loop in a multi-country setting. Sovereign debt serves as collateral in the interbank market and its value underpins the investment of banks with access to productive projects. Bad news about the likelihood of debt repayment in the future reduces the collateral value of government debt leading to lower investment and output. With diversified bond holdings across countries and, a shock that is symmetric across countries is propagated to other economies causing excessive bailouts and amplifying the sovereign-bank loop. Diversification is potentially beneficial under asymmetric shocks.  A highly integrated banking market such as Europe's provides multiple valuable mechanisms for sharing risks across countries.