Two sets of actions seem to be key in tackling these concerns at their root: one set to strengthen bank balance sheets and another set of actions to break the self-reinforcing loop between bank and sovereign debt risks and move to truly unified European supervision. To strengthen bank balance sheets, first, adequate capital ratios must be reached in the banking system.
The EBA Capital Exercise, with EU banks being expected to reach a core Tier 1 capital ratio of 9% by the end of this month, will be an important milestone. Regulators should then make sure that the subsequent transition to the Basel III framework does not result in a weakening of the capital buffers. The heterogeneity of capital ratios must also be reduced.