All this, in a world of asymmetric information, can indeed be a source of serious liquidity risk and financial instability. The specific nature of the banking sector and the objective of financial stability should also be treated in a more structured way in the European Commission’s approach to competition and state aid.
Adopted in 2013 – and based on the unfortunately premature conviction that the difficulties of European banks had by then been dealt with – the current approach greatly limits government intervention to support banks that are fundamentally viable in order to remedy market failures or negative externalities that are not originated by managerial shortcomings.