European Banks and the Covid-19 Crash Test

The Covid-19 crisis is not a financial crisis but it can become a serious test for European banks’ strength and resilience: they are stronger today than they were on the eve of the 2007-2008 financial crisis, however the Covid-19 shock more closely resembles the Great Depression of the 1930s. This policy brief from Jézabel Couppey-Soubeyran (EconPol Europe, University Paris 1 Panthéon-Sorbonne, CEPII), Erica Perego (EconPol Europe, CEPII) and Fabien Tripier (EconPol Europe, Université Paris-Saclay (Univ. Evry), CEPII) presents the problems that the Covid-19 crisis poses to banks, the proposals currently under discussion and the decisions taken to date by the monetary and prudential authorities. It highlights the fragility of the current prudential framework and the inadequacy of the resolution mechanism, which will require additional resources if the banking crisis cannot be avoided.