When it rains, does it still pour? Quantifying contingent fiscal liabilities risks stemming from EU banks in times of severe stress

This chapter presents a methodology to assess the potential impact of banks’ losses on EU public finances using the Systemic Model of Banking Originated Losses (SYMBOL), a micro simulation model developed by the European Commission's Joint Research Centre (JRC) and Directorate General Financial Stability, Financial Services and Capital Markets Union (DG FISMA). In the context of the Commission’s debt sustainability analysis, SYMBOL can provide a complementary analysis of government contingent liabilities risks stemming from the banking sector. By inferring the probability of EU banks’ losses in the event of a major banking crisis, the model estimates the potential residual costs for public finances after all layers of the legal safety net of the EU regulatory framework have been deployed (i.e., capital, bail-in and resolution funds). The analysis also illustrates how financial vulnerabilities could affect public debt developments in times of severe stress in the EA and the EU. Overall, the results point to a significant resilience and, in case resolution is ultimately needed, to enough buffers in the banking sector across the EU and the EA as a whole, in case of future large shocks. Relatedly, (implicit) contingent liabilities’ risks for the public sector are generally contained, with limited residual costs for public finances. This analysis notably reflects the financial reforms initiated in the aftermath of the 2008 global financial crisis. Despite this, there could be differences across countries