Walking a tightrope. Covid-19 and expected capital shortfalls for top European banks

Back in June 2020, we published the first edition of this years European Banking Study (EBS) on the impact of the COVID-19 pandemic on top European banks. Our simulation revealed that selected institutions will suffer significantly from higher costs of risk and hence are facing substantial losses in their P&L in the next 18-24 months. 
With the now available second edition of our study, we want to bring another essential aspect to the table: COVID-19 impact on banks’ capitalisation. It is widely expected, that due to the economic downturn and the expected increase of non-performing loans, higher expected losses (EL) and risk-weighted assets (RWAs) will lead to deteriorating capital ratios.
Building upon these results we want to address three key aspects. In chapter 1 we give a short update on the financial situation of Europe’s 50 largest banks as they stand 4-5 months into the pandemic. In the second part, we present a proprietary, previously unpublished approach of simulating capital impact of COVID-19. Lastly, we draw implications for bank’s management, regulators and governments and pose key questions that should be in the centre of the discussion going forward.
Our goal is to provide directional guidance based on our tried and tested models for bank management, regulators, governments and all other interested in this topic.