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

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  • Lazzari, Valter
  • Vena, Luigi
  • Venegoni, Andrea

Abstract

It is common in the supervision of banks to perform and disclose a simultaneous standardized assessment of their asset quality, organizational effectiveness, strategic viability and resilience to financial turmoil. By investigating the European Central Bank 2014 Comprehensive Assessment and the stock reactions of the banks to its findings, we find that this process provides limited assistance to the market in sorting good from troubled banks. Notwithstanding, the market adjusts to these findings, since it understands that they signal the stance of supervisory policy toward banking activities, which begets the level of regulatory risk and cost for the supervised banks.

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  • Lazzari, Valter & Vena, Luigi & Venegoni, Andrea, 2017. "Stress tests and asset quality reviews of banks: A policy announcement tool," Journal of Financial Stability, Elsevier, vol. 32(C), pages 86-98.
    • Handle: RePEc:eee:finsta:v:32:y:2017:i:c:p:86-98
    DOI: 10.1016/j.jfs.2017.09.001
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    Cited by:

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    2. Kok, Christoffer & Müller, Carola & Ongena, Steven & Pancaro, Cosimo, 2023. "The disciplining effect of supervisory scrutiny in the EU-wide stress test," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    3. Kasim Ahmed & Giovanni Calice, 2023. "The effects of supervisory stress testing on bank lending: examining large UK banks," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(2), pages 228-247, June.
    4. Małgorzata Iwanicz-Drozdowska & Krzysztof Jackowicz & Maciej Karczmarczyk, 2021. "“The Crooked Smile of TCR†: Banks’ Solvency and Restructuring Costs in the European Banking Industry," SAGE Open, , vol. 11(3), pages 21582440211, September.
    5. Sahin, Cenkhan & de Haan, Jakob & Neretina, Ekaterina, 2020. "Banking stress test effects on returns and risks," Journal of Banking & Finance, Elsevier, vol. 117(C).
    6. Wu, Deming & Fang, Ming & Wang, Qing, 2018. "An empirical study of bank stress testing for auto loans," Journal of Financial Stability, Elsevier, vol. 39(C), pages 79-89.
    7. Abad, Pilar & Robles, M.-Dolores & Alonso Orts, Carlos, 2023. "Stress testing programs and credit risk opacity of banks: USA vs Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    8. Myriam García-Olalla & Manuel Luna, 2021. "Market reaction to supranational banking supervision in Europe: Do firm- and country-specific factors matter?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(4), pages 947-975, November.
    9. Moustapha Daouda Dala & Isabelle Distinguin & Alain Sauviat, 2020. "What is the information value of bank's stress tests? An investigation using banks' bond split ratings," Economics Bulletin, AccessEcon, vol. 40(1), pages 485-499.
    10. Kasinger, Johannes & Krahnen, Jan Pieter & Ongena, Steven & Pelizzon, Loriana & Schmeling, Maik & Wahrenburg, Mark, 2021. "Non-performing loans - new risks and policies? NPL resolution after COVID-19: Main differences to previous crises," SAFE White Paper Series 84, Leibniz Institute for Financial Research SAFE.
    11. Pacicco, Fausto & Vena, Luigi & Venegoni, Andrea, 2020. "Communication and financial supervision: How does disclosure affect market stability?," Journal of Empirical Finance, Elsevier, vol. 57(C), pages 1-15.
    12. Nguyen, Thach Vu Hong & Ahmed, Shamim & Chevapatrakul, Thanaset & Onali, Enrico, 2020. "Do stress tests affect bank liquidity creation?," Journal of Corporate Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Stress test; Banks; Supervision; Signaling; ECB;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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