Bank capital and the European recovery from the COVID-19 crisis

White Paper No. 69

Authors:
Moritz Schularick,
Sascha Steffen,
Tobias Tröger
Research Area:
Law and Finance, Macro Finance
Date:
Jun 2020
Keywords:
bank capital, financial stablity, COVID-19
Abstract:

Do current levels of bank capital in Europe suffice to support a swift recovery from the COVID-19 crisis? Recent research shows that a well-capitalized banking sector is a major factor driving the speed and breadth of recoveries from economic downturns. In particular, loan supply is negatively affected by low levels of capital. We estimate a capital shortfall in European banks of up to 600 billion euro in a severe scenario, and around 143 billion euro in a moderate scenario. We propose a precautionary recapitalization on the European level that puts the European Stability Mechanism (ESM) center stage. This proposal would cut through the sovereign-bank nexus, safeguard financial stability, and position the Eurozone for a quick recovery from the pandemic.

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