Policy Article

Bank Capital and the European Recovery from the COVID-19 Crisis


  • Schularick
  • M.
  • Steffen
  • S.
  • Tröger
  • T.
Publication Date

Do current levels of bank capital in Europe suffice to support a swift recovery from the COVID-19 crisis? Recent research shows that a well-capitalized banking sector is a major factor driving the speed and breadth of recoveries from economic downturns. In particular, loan supply is negatively affected by low levels of capital. We estimate a capital shortfall in European banks of up to 600 billion euro in a severe scenario, and around 143 billion euro in a moderate scenario. We propose a precautionary recapitalization on the European level that puts the European Stability Mechanism (ESM) center stage. This proposal would cut through the sovereign-bank nexus, safeguard financial stability, and position the Eurozone for a quick recovery from the pandemic.

Kiel Institute Expert


JEL Classification
G01, G20, E50

Key Words

  • Bank Capital
  • Covid-19
  • Financial Stability