The worsening capital position of the banks has a number of consequences with destabilizing feedbacks for financial markets and the real economy. Regulatory authorities in Germany are forced to close a bank if its core capital quota falls below 4 percent. The threat of imminent bank closures is a source of insecurity for market participants and isolates the affected banks from capital flows. In addition, banks are forced to limit the amount of credit they provide if they lack the necessary equity capital. This increases the chances that companies outside the banking sector will have excessive difficulty.
