Capital Shortfalls of European Banks since the Start of the Banking Union

Since the start of the Banking Union in November 2014, European banks lost nearly half their market capitalization. Important risks in bank balance sheets are still unaccounted for requiring an even larger recapitalization compared to the capital shortfall estimates of November 2014. The market’s assessment of banks’ risky assets is still decoupled from their book valuation and associated Basel risk-weights, causing a divergence between market and regulatory assessments of bank capital. Not only Italian but also German and French banks show large capital shortfalls, some of which may require public backstops if losses are not to be passed onto non-subordinated debt holders of banks.

Steffen, Sascha, Viral V. Acharya and Diane Pierret (2016), Capital Shortfalls of European Banks since the Start of the Banking Union,