But, ultimately, resolving the issue of non-performing loans cannot be seen in isolation from an adequate capitalization of banks. In striking a balance between risk-taking by entrepreneurs in the real economy and financial stability, equity finance plays a key role.
In contrast to debt contracts, equity contracts feature “automatic” risk-sharing mechanisms: investors benefit from positive, upside risks but they can also lose their investments if a negative shock hits. In Europe, equity markets in general and venture capital markets in particular remain underdeveloped. Opportunities for cross-border risk-sharing are insufficiently exploited.