Stress tests and asset quality reviews of banks: A policy announcement tool

Lazzari, Valter; Vena, Luigi; Venegoni, Andrea

doi:10.1016/j.jfs.2017.09.001

Cited by 23 publications

(8 citation statements)

References 28 publications

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“…This enhanced disclosure allows market investors to better price bank risk by providing additional information about banks' possible vulnerabilities and thus reducing information asymmetries. Accordingly, various studies show that the disclosure of stress test results has a disciplining eect on banks' risk (Petrella and Resti, 2013;Morgan, Peristiani, and Savino, 2014;Georgescu, Gross, Kapp, and Kok, 2017;Flannery et al, 2017;Lazzari, Vena, and Venegoni, 2017;Ahnert, Vogt, Vonho, and Weigert, 2018;Fernandes, Igan, and Pinheiro, 2020).…”

Section: 2mentioning

confidence: 99%

The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test

et al. 2021

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Using a dierence-in-dierences approach and relying on condential supervisory data and an unique proprietary data set available at the European Central Bank related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining eect on bank risk. We nd that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we nd that the disciplining eect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise.

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Section: 2mentioning

confidence: 99%

The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test

et al. 2021

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“…The authors conclude that the stress test results did indeed have a significant impact on stock prices and, thus, provided new information. Similarly, Lazzari, Vena, & Venegoni (2017) show in another event study that the disclosure of the results of the 2014 EBA stress test affected banks' stock prices. However, the paper concludes that the exercise was not able to identify troubled banks.…”

Section: Information Valuementioning

confidence: 83%

System-Wide and Banks' Internal Stress Tests: Regulatory Requirements and Literature Review

Pliszka

2021

SSRN Journal

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Research questionThe financial crisis of 2007-09 revealed the vulnerability of banks. In response, stress testing was established as a key supervisory element and as an essential risk management tool. Based on these developments, this paper first deals with system-wide stress tests and provides an overview of their evolution, compares programs in major jurisdictions, and reviews the academic literature. Second, this paper summarizes regulatory requirements and expectations for banks' internal stress tests and gives an overview of the relevant literature. ContributionThis paper contributes to the literature, as it deals with both system-wide stress tests and banks' internal stress tests and discusses the differences between the two types. Moreover, it provides an update of earlier surveys by covering discussions from 2019-20 on the envisaged changes to system-wide stress testing in the EU and the US. ResultsSystem-wide stress tests have gained in importance. For instance, they feed into the calculation of capital requirements in the EU. The literature shows that the disclosure of stress test results reveals new information to the market. Furthermore, banks that participate in system-wide stress tests increase their capital ratios and shift lending to less risky borrowers. Banks' internal stress tests are deeply embedded in the Basel III framework and the banks that apply internal models are subject to more stringent stress testing requirements. For example, these banks have to ensure capital adequacy if the internal risk parameters are being stressed. Research on banks' internal stress tests shows that stress scenarios derived from expert judgment should be complemented by scenarios, which consider historical characteristics of the risk factors. As stress testing is exposed to considerable model and estimation risk, banks should carry out extensive robustness checks. In sum, both system-wide and banks' internal stress tests play a complementary role in ensuring resilience of individual banks and the financial system to adverse shocks. Nichttechnische ZusammenfassungFragestellung Als Reaktion auf die Finanzmarktkrise 2007 bis 2009 wurden Stresstests als ein zentrales Element der Aufsicht und als ein wichtiges Instrument im Risikomanagement etabliert. Ausgehend von diesen Entwicklungen befasst sich dieses Papier zunächst mit systemweiten Stresstests und gibt hierbei eine Übersicht über die Entwicklung, vergleicht Programme aus verschiedenen Jurisdiktionen und rezensiert die wissenschaftliche Literatur. Zum anderen fasst das Papier regulatorische Erwartungen zu bankinternen Stresstests zusammen und gibt einen Überblick über die einschlägige Literatur. Beitrag Der Beitrag des Papiers liegt darin, dass es sich sowohl mit systemweiten als auch mit bankinternen Stresstests beschäftigt und dabei die Unterschiede diskutiert. Darüber hinaus geht es auf Diskussionen aus 2019 und 2020 zu angedachten Änderungen bei systemweiten Stresstests in der EU und in den USA ein. Ergebnisse Systemweite Stresstests haben an Bedeutung gewo...

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“…On the one hand, Quijano (2014), with regard to the bond market, and Morgan et al (2014), with regard to the stock market, maintained that stress tests reveal previously unknown information. On the other hand, Lazzari et al (2017) showed that the comprehensive assessment performed by the European Central Bank in 2014 did not add much to the publicly available information and provided limited assistance to the market in discriminating between good and bad banks. These authors claimed that the outcomes of the comprehensive assessment (including stress tests) were valuable mainly because they predicted the supervisory policy stance and its severity.…”

Section: Literature Reviewmentioning

confidence: 99%

“The Crooked Smile of TCR”: Banks’ Solvency and Restructuring Costs in the European Banking Industry

2021

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In this study, we analyze the probability of bank failure, the expected losses, and the costs of bank restructuring with the application of a lognormal distribution probability function for three categories of European banks, that is, small, medium, and large, over the post-crisis period from 2012 to 2016. Our goal was to determine whether the total capital ratio (TCR) properly reflects banks’ solvency under stress conditions. We identified a phenomenon that one can call the “crooked smile of TCR”. Medium-sized banks with relatively high TCRs performed poorly in stress tests; however, the probability of bank failure increases slightly with the size of the bank, while the TCR decreases. We claim that the focus on capital adequacy measures is not sufficient to achieve the goal of improving banks’ stability and reducing their restructuring costs. Our results are of special importance for medium-sized banks, as these banks are not regularly subjected to publicly available stress tests.

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Stress tests and asset quality reviews of banks: A policy announcement tool

Cited by 23 publications

References 28 publications

The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test

The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test

System-Wide and Banks' Internal Stress Tests: Regulatory Requirements and Literature Review

“The Crooked Smile of TCR”: Banks’ Solvency and Restructuring Costs in the European Banking Industry

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