New Economy Short Cut & INET Debt Talk – Who’s Afraid of European Banks?






Does the COVID recession still have the potential to turn into a broader financial meltdown?


The world economy entered the COVID-19 pandemic with record debt levels. Since the global financial crisis, private and public debts have grown to more than $250 trillion, about three times global GDP. With the current crisis, global debt will surge even further. This has deep implications for the way our economies, societies, and politics work. In this episode, we will explore the current situation and the outlook for European banks in and after the pandemic, default risks and potential losses in loan and bond markets and the effects of an overhang of debt on corporate balance sheets and future investments.


Our next Short Cut will be hosted in partnership with the INET webinar series “Debt Talks”. Join us for a fascinating discussion with Martin Arnold (Frankfurt Bureau Chief, Financial Times), Elena Carletti (Professor of Finance, Bocconi University) and Richard Vague (Acting Secretary of Banking and Securities, Commonwealth of Pennsylvania; Chair, The Governor’s Woods Foundation). Thomas Fricke will be moderating the session together with INET Fellow and our academic partner Moritz Schularick (Professor of Economics, University of Bonn).

  • Why are European banks in much worse shape than their American counterparts? What’s driving this, and what can be done about it?
  • Are Europe’s financial institutions in a position to support the recovery, or is the worst still to come?
  • What should Europe’s banking landscape look like in 10 years?

Martin Arnold argued that banks today are better capitalized then they were in 2008. The Common Equity Tier 1 (CET1) was 15.2% in Sept 2020 (up from 14.4% in 2019). Yet, Arnold noted that governments have played a central role in protecting banks from the Covid19 economic crisis. The more concerning metric to look at, Arnold said, is profitability. Whereas the return on equity (ROE) in 2019 was at 5.2% already below the banks’ cost of capital, ROE in September 2020 was merely 2.1%.

Elena Carletti agreed that main problem that banks will face in the short and long run will be profitability. On the one hand, banks are facing increasing competition from FinTech companies and Big Tech organizations. But Carletti expressed some optimism, noting that banks have made big steps digitizing their processes and infrastructure. On the other hand, Carletti pointed out that banks will have to find a way to deal with the large amount of non-performing loans (NPLs) created by the Covid19 economic crisis.

Richard Vague argued that public debt, whether in the EU or in the US, is not the most pressing issue. The main problem is private debt is. Yet private debt levels differ across the EU. The Netherlands for example have a larger private debt level than France, which has a higher level than Italy. The way out, Vague said, is better debt resolution. This will clean banks’ balance sheets up faster and paint a clearer picture of the Economy

Elena Carletti agreed that there is a need to harmonize the European framework for bankruptcies on the European level. Martin Arnold added that a completion of the European banking union would be a big step forward and that he is optimistic about the chances to make real progress on this front, since Mario Draghi, Italy’s new Prime Minister, knows about the need to complete the banking union.

Finally, the panelists discussed the role of the ECB in fighting climate change. The general sentiment was that the ECB is not going to focus its purchases on “green assets” any time soon. But there are other things that the ECB can and should do. Elena Carletti argued that changes in the collateral rules for banks that incorporated the risks of brown assets, would have a big impact on greening the economy. Martin Arnold added that the ECB could do much more in terms of banking supervision and stress testing.