European Banks and the Covid-19 Crash Test

Jézabel Couppey-Soubeyran, Erica Perego and Fabien Tripier

No 30, EconPol Policy Brief from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: European banks are stronger today than they were on the eve of the 2007-2008 financial crisis, thanks to the reforms that have taken place since then. But will they be strong enough in the face of a health crisis closer to the Great Depression of the 1930s than the stress scenarios envisaged by the European banking Authority for 2020? Access to central bank liquidity probably eliminates the risk of bank illiquidity, but it is not unthinkable that a bank insolvency crisis would have to be managed. The non-repayment of one in five loans would be enough to exhaust the current level of capital. The resolution mechanism would then have to be mobilised, which is unlikely to be sufficient in a context where, according to the European Systemic Risk Board, the risk of simultaneous defaults is increasing sharply. This would leave the possible mobilisation of the European Stability Mechanism. If this complement proves insufficient, a sovereign debt crisis in the euro area could re-emerge.

Date: 2020
New Economics Papers: this item is included in nep-cba and nep-rmg
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