Supervisors as Information Producers: Do Stress Tests Reduce Bank Opaqueness?

Petrella, Giovanni; Resti, Andrea

doi:10.2139/ssrn.1968681

“…As in previous studies (Petrella and Resti 2013, Morgan et al 2014, Candelon and Sy 2015, Bird et al 2015, we find statistically significant average cumulative abnormal returns (CARs) for stress tested BHCs around many, though not all, of the stress test disclosure dates. Also like previous studies, these average CARs are sometimes positive and sometimes negative, suggesting that simply averaging positive and negative abnormal returns in a standard event study could obscure the impact of stress test disclosures.…”

supporting

confidence: 82%

“…Previous authors have studied market reactions to stress test announcements (Morgan et al 2014, Petrella and Resti 2013, Candelon and Sy 2015, Bird et al 2015. They have found mixed evidence of whether banking firms experience significant abnormal average stock returns when supervisory stress test results are disclosed.…”

Section: Introductionmentioning

confidence: 99%

Evaluating the Information in the Federal Reserve Stress Tests

Flannery

¹

,

Hirtle

²

,

Kovner

³

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe find evidence that the Federal Reserve stress tests (CCAR and DFAST) produce information about the stress-tested firms as well as other, non-stress-tested banking companies. Although standard event studies do not always show abnormal returns for the stress-tested sample on average, we argue that such tests are ill-suited for this sort of information event. Using a different empirical approach, we show that around stress test announcement dates, the absolute value of the cumulative abnormal returns (|CAR|) of stress-tested bank holding companies averages almost 3 percent. Cumulative abnormal trading volumes are more than 1 percentage point higher than a market model would predict. Absolute value abnormal returns and volumes are higher for more levered and riskier firms. We explore several theoretical hypotheses outlined in Goldstein and Sapra (2014) but find no evidence of negative welfare costs associated with the disclosure of stress test results.

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“…Looking at disclosure of the 2011 European stress tests, Petrella and Resti (2013) find that stress tested banks had significantly larger announcement date cumulative abnormal returns than non-stress tested banks. They also find that cumulative abnormal returns were larger for BHCs that experienced smaller declines in regulatory capital in the stress test, consistent with the idea that the stress test provided information about the capital strength of individual BHCs.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Evaluating the information in the federal reserve stress tests

Flannery

¹

,

Hirtle

²

,

Kovner

³

2017

Journal of Financial Intermediation

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe find evidence that the Federal Reserve stress tests (CCAR and DFAST) produce information about the stress-tested firms as well as other, non-stress-tested banking companies. Although standard event studies do not always show abnormal returns for the stress-tested sample on average, we argue that such tests are ill-suited for this sort of information event. Using a different empirical approach, we show that around stress test announcement dates, the absolute value of the cumulative abnormal returns (|CAR|) of stress-tested bank holding companies averages almost 3 percent. Cumulative abnormal trading volumes are more than 1 percentage point higher than a market model would predict. Absolute value abnormal returns and volumes are higher for more levered and riskier firms. We explore several theoretical hypotheses outlined in Goldstein and Sapra (2014) but find no evidence of negative welfare costs associated with the disclosure of stress test results.

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“…Petrella and Resti (2013) examine the 2011 EBA stress tests and find that stresstested banks that came out with less damage to their capital in the stress scenarios had cumulative abnormal returns higher than both untested banks and other tested banks. This is in line with the argument that stress tests reveal information about the strength of individual banks.…”

Section: B Literature Reviewmentioning

confidence: 99%

March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?

Fernandes

¹

,

Igan

²

,

Pinheiro³

2015

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Annual stress tests have become a regular part of the supervisors' toolkit following the global financial crisis. We investigate their capital market implications in the United States by looking at price and trade reactions, information asymmetry and uncertainty indicators, and bank activities. The evidence we present supports the notion that there is important new information in stress tests, especially at times of financial distress. Moreover, public disclosure seem to help reduce informational asymmetries. Importantly, public disclosure of stress test results (and methodology) does not seem to have reduced private incentives to generate information or to have led to distorted incentives. JEL Classification Numbers: G14, G28, G32

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Supervisors as Information Producers: Do Stress Tests Reduce Bank Opaqueness?

Cited by 52 publications

References 13 publications

Evaluating the Information in the Federal Reserve Stress Tests

Evaluating the Information in the Federal Reserve Stress Tests

Evaluating the information in the federal reserve stress tests

March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?

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