A wellestablished European supervisory body that is capable of acting can recognise emerging internal risks in banks and strengthen their resilience and risk-bearing capacity. In addition, in the event of a crisis the ECB will be able to resort to the sound judgement of the SSM. This is especially true for the emergency liquidity assistance, which the national central banks are responsible for granting.
Such a loss of confidence, in turn, makes it impossible for affected institutions to roll over existing debts or extend new credit, and may force deleveraging that requires selling illiquid assets quickly and cheaply in asset fire sales, resulting in further declines in asset prices. Such developments further threaten the solvency of financial institutions and intensify credit contraction, depriving households and businesses of financing.