The aim of this paper is to analyze the impact of the country risk premium on the activity of Croatian banks. Country risk premium is a key determinant of many economic and financial indicators. In most common approach, three measures are identified, so there are government bond yields, goverment bond spread and CDS spread. In fact, backgrounds of those measures are bond market and government bonds. One of the biggest investors in government bonds are commercial banks, which represents the interconnection of sovereign and banking system. In literature, that connection is investigated under the term of sovereign-bank nexus. There are a few transmission channels through which a tensions from government bond markets may be transmitted into the banking system, with effects on the economy as a whole. Recent EU sovereign debt crisis is the best example of how the increased country risk premium negatively affects banks. The model of multiple linear regression is specificied to assess the impact of country risk premium on specific banking indicators in Croatia. Analysis covered period from last quarter of 2011 to first quarter of 2020. Results of the model show that country risk premium has an impact on both, the interest rates on deposits and interest rates on loans. Moreover, there is also an impact on bank lending. It can be concluded, based on the analysis, that 1 percentage point increase of spread , which represents country risk premium, is associated with 3 basis points increase in the interest rates on overnight deposits and 35 basis points increase in the interest rates on deposits with agreed maturity. Also, 1 percentage point increase in sovereign spread is associated with a 62 b.p., 102 b.p. and 60 b.p. increase, respectively, in the intrerest rates on loans to households for house purchase, consumer credit to households and loans to firms.