2.6 Restoring the balance sheet of a bank in financial difficulties

Banks can get into financial difficulties for many reasons, differing from inefficiency or excessive risk taking to difficulties in raising funds from external parties due to market restraints. Financial difficulties can appear in multiple ways on the balance sheet of a bank. It may for example be that the market value of loans is less than listed on the bank's balance sheet (e.g. in case of non-performing loans) as a result of which it is necessary to write-down the value of these loans. Such a reduction in the assets side of the balance sheet will automatically trigger a reduction in the liabilities and equity side of the balance sheet (e.g. by reducing the reserves, if any). It may also be that a bank is unable to attract capital in the market as a result of which it cannot (or no longer) meet the applicable regulatory capital requirements. Depending on the type and seriousness of the financial difficulties, a bank can use different tools to restore its balance sheet. These tools can be broadly categorized in funding instruments, addressing the equity and liabilities side of the balance sheet, and asset measures, addressing the asset side of the balance sheet.