DP14927 Bank capital and the European recovery from the COVID-19 crisis
|Author(s):||Moritz Schularick, Sascha Steffen, Tobias Tröger|
|Publication Date:||June 2020|
|Keyword(s):||bank capital, COVID-19, financial stablity|
|JEL(s):||E50, G01, G20|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14927|
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.