Discussion Paper Details

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

Author(s): Moritz Schularick, Sascha Steffen and Tobias Tröger

Publication Date: June 2020

Keyword(s): bank capital, COVID-19 and financial stablity

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

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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Bibliographic Reference

Schularick, M, Steffen, S and Tröger, T. 2020. 'Bank capital and the European recovery from the COVID-19 crisis'. London, Centre for Economic Policy Research.