I. Introduction

In this chapter, we show how misleading this characterization is. The recapitalization orchestrated by the European Banking Authority (EBA) was based on a questionable capital assessment methodology. Basing regulatory capital requirements on risk-weighted assets (RWA) is a much less reliable indicator of banks' soundness and resilience than simpler ratios of capital to total assets (Acharya et al. 2011). We therefore compare the assessments undertaken by the EBA—all of which are based on RWA—with data on leverage ratios, defined as equity capital to total assets.

The key findings are as follows. First, by equity capital criteria, the recapitalization of European banks was insufficient at best, and little but a smokescreen in many cases. Only 7 out of 24 banks actually increased their ratio of equity capital to total assets. Second, the least well-capitalized banking sector among the larger Eurozone countries is not Spain or Italy, but Germany, closely trailed by France. The banking sectors of Spain and Italy have equity to total assets roughly double the size of those of Germany and France, contrary to what one might have expected. Third, European banking remains several quantum leaps away from the levels of equity capital recommended by scholars—and, hence also remains vulnerable to shocks, and dependent on various forms of state subsidies, guarantees, and bailouts. Fourth, the EU's new capital requirement regulation and directive, the CRD4, will institutionalize the European reluctance to recapitalize its banks, and hence impede rather than improve the resilience of European banks.