EU banks’ vulnerabilities

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 crisis, EU policymakers should require banks to suspend all discretionary distributions and preserve capital instead.