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Regulatory Stress Tests and Bank Responses: Heterogeneous Treatment Effect in Dynamic Settings

Author

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  • Karel Janda

    (Prague University of Economics and Business and Institute of Economic Studies, Faculty of Social Sciences, Charles University)

  • Oleg Kravtsov

    (Prague University of Economics and Business)

Abstract

We investigate how the regulatory stress-test framework in the European Union affects banks' investment decisions and portfolio choices. Using the causal inference and event-study methods, we document a substantial impact of EU-wide stress tests in 2011, 2014, and 2016 on the banks' portfolio strategies. The banks subject to regulatory stress tests tend to structure their portfolios with lower-risk assets, which is reflected in a decline in risk-weighted assets. At the same time, the dynamic of realized risk that is measured by the proportion of non-performing exposure in portfolios remains unaffected. The magnitude of such effect rises with the increase in the size of the banks' assets.

Suggested Citation

  • Karel Janda & Oleg Kravtsov, 2022. "Regulatory Stress Tests and Bank Responses: Heterogeneous Treatment Effect in Dynamic Settings," International Journal of Central Banking, International Journal of Central Banking, vol. 18(2), pages 1-49, June.
    • Handle: RePEc:ijc:ijcjou:y:2022:q:2:a:1
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    References listed on IDEAS

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    Cited by:

    1. Homma, Yasutake & Suzuki, Katsushi, 2023. "TLAC bonds and bank risk-taking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    2. Pavel Jankulár, 2024. "Risk-return Portfolio Level Trade-off for Czech Banks," Prague Economic Papers, Prague University of Economics and Business, vol. 2024(2), pages 187-219.

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    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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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