In this paper we study the impact of sovereign rating downgrades on private credit. We exploit the asymmetric impact of sovereign downgrades on the ratings of banks at the sovereign bound versus banks below the bound due to sovereign ceiling policies followed by credit rating agencies. We find that sovereign downgrades lead to greater reductions in loan amounts and greater increases in loan spreads of banks at the sovereign bound relative to otherwise similar banks below the bound. Lending to foreign borrowers is also significantly affected, confirming a causal interpretation of the results. We show that the lending supply effects can be attributed to the bank’s limited ability to access wholesale and long-term funding. Our findings suggest that sovereign creditworthiness has important effects on the supply of bank lending to the private sector.