When it rains, does it still pour? Quantifying contingent fiscal liabilities risks stemming from EU banks in times of severe stress

Mario Bellia, Francois Courtoy and Adja Awa Sissoko

Quarterly Report on the Euro Area (QREA), 2023, vol. 22, issue 3, 23-34

Abstract: This chapter presents a methodology to assess the potential impact of banks’ losses on EU public finances using the Systemic Model of Banking Originated Losses (SYMBOL), a micro simulation model developed by the European Commission's Joint Research Centre (JRC) and Directorate General Financial Stability, Financial Services and Capital Markets Union (DG FISMA). In the context of the Commission’s debt sustainability analysis, SYMBOL can provide a complementary analysis of government contingent liabilities risks stemming from the banking sector. By inferring the probability of EU banks’ losses in the event of a major banking crisis, the model estimates the potential residual costs for public finances after all layers of the legal safety net of the EU regulatory framework have been deployed (i.e., capital, bail-in and resolution funds). The analysis also illustrates how financial vulnerabilities could affect public debt developments in times of severe stress in the EA and the EU. Overall, the results point to a significant resilience and, in case resolution is ultimately needed, to enough buffers in the banking sector across the EU and the EA as a whole, in case of future large shocks. Relatedly, (implicit) contingent liabilities’ risks for the public sector are generally contained, with limited residual costs for public finances. This analysis notably reflects the financial reforms initiated in the aftermath of the 2008 global financial crisis. Despite this, there could be differences across countries

Keywords: debt sustainability; feedback loop; government debt; SYMBOL (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economy-finance.ec.europa.eu/document/down ... b1e6-3dbd2beb1c07_en (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0223-02

Access Statistics for this article

More articles in Quarterly Report on the Euro Area (QREA) from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission Contact information at EDIRC.
Bibliographic data for series maintained by ECFIN INFO ().