The absurdity of euro-zone banks’ model will be reinforced after the COVID crisis

The COVID crisis will lead to an upward revision of the level of banking risk in the euro zone: The loss of GDP in 2020 is far larger than those observed in the past; The transfer of savings into bank deposits will increase the role of bank intermediation in the financing of the economy. If banking risk is higher, euro-zone banks will have to hold more capital, especially if banks’ stress tests become more stringent after the crisis. But if savers’ perception of banking risk deteriorates, the situation will be absurd: banks will need to hold more capital at the same time as demand for bank shares among savers will fall. This absurdity is intrinsic to the model of euro-zone banks: the riskier the banks, the more difficult it is for them to raise capital, but the more capital they have to hold.