The second reason is the fear that the counterparty will face difficulty and will not be in a position to reimburse the loan. This explains why, in spite of a high spread of over 100 basis points between the ECB refinancing rate and the three-month interbank rate, the arbitrage opportunity is not exploited.
Banks will eventually bear costs for implementing a market-based solution. However, banks may benefit from the introduction of a gradual loss recognition mechanism that allows strengthening of capital adequacy reserves, if necessary. Shareholders are not subjected to undue dilution because of loss-triggered DTC conversion.