EU banks’ vulnerabilities: Capital conservation key to withstanding Corona crisis. Bertelsmann Stiftung Policy Brief May 2020.

Mack, Sebastian (2020) EU banks’ vulnerabilities: Capital conservation key to withstanding Corona crisis. Bertelsmann Stiftung Policy Brief May 2020. [Policy Paper]

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Abstract

COVID-19 will hit financial institutions with a substantial time lag, but the coming storm will be fierce. The EU banking sector is entering the troubled waters of the Corona crisis with four major vulnerabilities: (1) Market and (2) funding liquidity risks have been mitigated by bold policy measures at EU and national level. (3) Concentration risk in banks’ sovereign exposures could be addressed by a European recovery fund. The immense economic fallout will further depress banks’ already weak (4) levels of profitability. Losses will erode banks’ capital base, putting their viability at severe risk. Monetary, fiscal and prudential emergency measures are keeping the real economy afloat but fail to enhance banks’ resilience. To withstand the cri- sis, EU policymakers should require banks to suspend all discretionary dis- tributions and preserve capital instead.

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