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The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money?

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  • Gros, Daniel

Abstract

It is generally assumed that any capital needs discovered by the Asset Quality Review the ECB is scheduled to finish by the end of 2014 should be filled by public funding (= fiscal backstop). This assumption is wrong, however. Banks that do not have enough capital should be asked to obtain it from the market; or be restructured using the procedures and rules recently agreed. The Directorate-General for Competition at the European Commission should be particularly vigilant to ensure that no further state aid flows to an already oversized European banking system. The case for a public backstop was strong when the entire euro area banking system was under stress, but this is no longer the case. Banks with a viable business model can find capital; those without should be closed because any public-sector re-capitalisation would likely mean throwing good money after bad.

Suggested Citation

  • Gros, Daniel, 2013. "The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money?," CEPS Papers 8775, Centre for European Policy Studies.
    • Handle: RePEc:eps:cepswp:8775
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    File URL: http://www.ceps.eu/system/files/PB311%20DG%20Asset%20Quality%20Review.pdf
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    Cited by:

    1. Gros, Daniel, 2013. "The Bank Resolution Compromise: Incomplete, but workable?," CEPS Papers 8776, Centre for European Policy Studies.

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