European banks have too little capital to enable the economy to recover quickly from the consequences of the Corona crisis. Depending on the extent and severity of the crisis, credit institutions may face capital shortfalls of between 143 billion euro and 600 billion euro. The comparatively largest losses in terms of book capital shortfall and market capital shortfall will be suffered by banks in France, Germany, Spain, and Italy.
However, a sufficiently capitalized banking sector is an important precondition for the European Economic Area to survive the impending recession. For a precautionary recapitalization of the European banking system, with the aim of helping the economy back on its feet, the as of now unused potential of the European Stability Mechanism (ESM) can be used. These are the conclusions drawn by researchers from the Leibniz Institute for Financial Market Research SAFE, the Frankfurt School of Finance & Management, and the University of Bonn from their observations in a joint SAFE White Paper.
Undercapitalized banks are a brake on the upswing
In order to support the European banking system, the researchers advocate organizing precautionary recapitalization measures at European level through the ESM. "The advantage of this approach is that no new regulatory structures need to be set up, but that the financial resources of the ESM, which have so far been unused during the crisis, serve as a pan-European safety net," says SAFE researcher Tobias Tröger, one of the authors of the paper. On the one hand, no bad banks would be necessary to wind up ailing financial institutions at national or European level. On the other hand, the doom loop of undercapitalized banks and overindebted sovereigns could be broken. "The ESM is the only existing European institution that is financially capable of finding a solution," summarizes Tröger.
According to the researchers, undercapitalized banks are slowing down the economic recovery from recessions. The reason for this is that the lack of capital reduces the loan supply of the institutions, which ultimately slows down debt-financed growth. "We know from the global financial crisis that banks need a solid capital cushion to contribute to economic recovery," says Tröger.
For their observations, the researchers ran through a bank stress test with various scenarios. The simulations are based on data from the European Banking Authority (EBA) on a sample of 79 Eurozone bank, 42 of which are publicly listed. The total assets of the banks in this sample amount to around 22 trillion euro. To illustrate the impact of the corona recession on Europe's banks, a systemic financial crisis was simulated in which global stock markets declined by 40 percent over a six-month period. The banks' deficits fluctuate depending on the minimum safe ratio of book capital to assets.
Download the SAFE White Paper No. 69
Scientific contact
Prof. Dr. Tobias Tröger
Director of the SAFE research cluster Law & Finance
Email: troeger@safe-frankfurt.de
Phone: +49 69 798 34391
