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European Banks and the Covid-19 Crash Test

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  • Jézabel Couppey-Soubeyran
  • Erica Perego
  • Fabien Tripier

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.

Suggested Citation

  • Jézabel Couppey-Soubeyran & Erica Perego & Fabien Tripier, 2020. "European Banks and the Covid-19 Crash Test," EconPol Policy Brief 30, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econpb:_30
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    File URL: https://www.ifo.de/DocDL/EconPol_Policy_Brief_30_European_Banks_Covid19.pdf
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    References listed on IDEAS

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    1. Haelim Anderson & Adam Copeland, 2020. "The Value of Opacity in a Banking Crisis," Liberty Street Economics 20200402, Federal Reserve Bank of New York.
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    Cited by:

    1. Ortmans, Aymeric & Tripier, Fabien, 2021. "COVID-induced sovereign risk in the euro area: When did the ECB stop the spread?," European Economic Review, Elsevier, vol. 137(C).
    2. Dotta, Vitor, 2022. "Addressing systemic risk in Europe during Covid-19: The role of regulation and the policy mix," IPE Working Papers 181/2022, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    3. Anne-Laure Delatte & Alexis Guillaume, 2020. "Covid 19: a new challenge for the EMU," Working Papers 2020-08, CEPII research center.
    4. Bacchiocchi, Andrea & Bischi, Gian Italo & Giombini, Germana, 2022. "Non-performing loans, expectations and banking stability: A dynamic model," Chaos, Solitons & Fractals, Elsevier, vol. 157(C).
    5. Piotr Lasak, 2021. "The Commercial Banking Sector in Eurozone after the Pandemic: The Paths to Recovery," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 1), pages 1233-1246.
    6. Willem THORBECKE, 2021. "Understanding the Transmission of COVID-19 News to French Financial Markets," Discussion papers 21037, Research Institute of Economy, Trade and Industry (RIETI).

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