Recapitalisation by the ESM, Europe's banks may face a huge capital shortfall

Europe's banks, especially the German institutions, in comparison to their American competitors bad: too little income and too high a cost. At least in the equity capital of the Bank have shown an overseer so far, confident that the first strikes of the Corona can be mastered crisis. But the great wave of credit default due to payment difficulties, in which many companies are yet to come, is just about to be.

Markus Frühauf

editor in the economy.

Now, the Bonn-based Economist Moritz Schularick sounds the Alarm. In a paper that he wrote together with the people's Sascha Steffen and Tobias Tröger for the London seat, at the end of the Center for Economic Policy Research (CEPR) economists, he appreciates the capital requirements for European banks due to the recession and the credit losses in an adverse scenario, to up to 600 billion euros. In a moderate course of the crisis could still be missing always 143 billion euros.

this is Why the Economists propose a precautionary recapitalisation of the European banks to make the Euro-crisis Fund, the ESM. This Institution keep the three economists therefore suitable, because of the close connection between banks and their home state be circumvented. In General, the banks are the main creditors of their States, which in turn supply in the event of a financial crisis, the institutions with fresh capital.

healthy banks recapitalize

In addition, the Economists suggest that the recapitalization for all banks, regardless of their Constitution take place. This is reminiscent of the actions of the American government after the financial crisis of 2008 when all the banks stabilised with equity. Most of the institutions pay back to the state quickly, as they were able to Finance this through equity placements in the capital market. The healthy European banks are to be allowed to pay after the presentation of the Economists to Schularick of the capital back if you have passed the stress test.

it is Interesting to note that the views expressed herein can only be the opinion of the authors reflect, but not as the position of the Federal Reserve Bank of New York or of the American Central Bank, the Federal Reserve understood to be in the paper. In addition to the University of Bonn and CEPR Schularick is assigned to in the paper as a researcher, the Federal Reserve Bank of New York.

The three economists hold the ESM, but also a more fundamental reason for the suitable Institution, in order to recapitalise the banks. The Euro-crisis Fund, as the only European Institution able to provide the necessary means to apply. The ESM should not be curtailed in its ability to recapitalize the institutions, but rather to be strengthened, suggest the authors.