During the financial crisis, most euro area governments provided financial assistance to ailing financial institutions with the aim of safeguarding financial stability and preventing a credit crunch. Over the period 2008-14 accumulated gross financial sector assistance amounted to 8% of euro area GDP, of which 3.3% has been recovered.
The fiscal costs of the assistance to financial institutions are comparable to those of other systemic banking crises in the past, as they led to a deterioration in the euro area budget balance and debt by a cumulated 1.8% and 4.8% of GDP respectively.
However, on average the measures account for a relatively small part of the overall strong increase in general government debt since the outbreak of the crisis. At the same time, outstanding government guarantees (amounting to 2.7% of euro area GDP at the end of 2014) and further potential losses of asset management vehicles to which impaired assets had been transferred still pose additional fiscal risks to governments.
Looking ahead, it is important both to reduce the likelihood of financial institutions facing severe balance sheet problems by enhancing bank capital, banking regulation and supervision, and to promote bank resolution policies that include private sector involvement, thereby protecting taxpayers. In this sense, the recent steps towards a genuine European banking union are encouraging and should not only help to prevent and/or resolve future banking crises in the euro area, but also to reduce their potential fiscal impact on government deficits and debt.
© ECB - European Central Bank
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