Bank recapitalization instruments under the european stability mechanism

Abstract

In this article, we compare the two instruments of financial assistance made available by the European Stability Mechanism (ESM) targeting the recapitalisation of financial institutions: the indirect recapitalisation tool and the direct recapitalization tool. The former is a loan to a sovereign; the latter is, in principle, an investment in the capital of a financial institution. As a result, the legal and institutional setup of ESM’s direct recapitalization instrument is more complex. The article highlights some fragilities of such setup.