Size of the decline in GDP and euro-zone banks' capital

In the aftermath of the subprime crisis, banking regulation became stricter and euro-zone banks had to hold significantly more capital than before the crisis. Banking regulators are now pleased to have made this choice, which enables banks to weather the coronavirus crisis and continue to lend, even if the default rate rises. We will therefore probably avoid the procyclical nature of bank behaviour that was very clear during the subprime crisis. As the loss of GDP is even worse during the coronavirus crisis than it was during the subprime crisis, it is even likely that as a result the recalib ration of banks’ stress tests, they will be required to hold even more capital in the future. But we should not forget the cost of this policy: as banks’ capital must be remunerated, the larger they are, the higher the cost of bank intermediation.