Bank Capital and the European Recovery from the COVID-19 Crisis

24 Pages Posted: 29 Jun 2020

See all articles by Moritz Schularick

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Sascha Steffen

Frankfurt School of Finance & Management

Tobias H. Troeger

Leibniz Institute for Financial Research SAFE; European Corporate Governance Institute (ECGI); European Banking Institute

Date Written: June 2020

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.

Keywords: bank capital, COVID-19, financial stablity

JEL Classification: E50, G01, G20

Suggested Citation

Schularick, Moritz and Steffen, Sascha and Tröger, Tobias Hans, Bank Capital and the European Recovery from the COVID-19 Crisis (June 2020). CEPR Discussion Paper No. DP14927, Available at SSRN: https://ssrn.com/abstract=3638031

Moritz Schularick (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Tobias Hans Tröger

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://safe-frankfurt.de/research/all-researchers/researchers-details/showauthor/prof-dr-tobias-troe

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.global/users/tobias-tr%C3%B6ger

European Banking Institute ( email )

Frankfurt
Germany

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