This policy note looks at what could happen if the ECB’s comprehensive assessment reveals capital shortfalls at banks that cannot then raise funds on the market.
The EU’s State Aid and Resolution frameworks require shareholders and certain creditors to contribute to a “precautionary recapitalisation”. But both frameworks contain safety valves that allow public money to be used in some cases without shareholders’ and creditors’ participation to protect financial stability. This highlights the fragile nature of the European banking sector and one of its major causes: bank interconnectedness. The policy implications are to address the problem at source with measures including bank structure reform.