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The Comprehensive Assessment: What lessons can be learned?

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  • Emilio Barucci
  • Roberto Baviera
  • Carlo Milani

Abstract

Analysing the database made available by the European Central Bank and by the European Banking Authority, we evaluate the Comprehensive Assessment (CA) (Asset Quality Review and Stress Test (ST)) of banks carried out in 2014. In a nutshell, the main results are: (i) risk-adjusted capital ratios are negatively related to the Asset Quality Review shortfall, but not to the ST shortfall, whereas the leverage ratio plays a significant role in both cases; (ii) the CA predominantly concentrated on traditional credit activity rather than on banks’ financial assets and (iii) the CA seems to be characterized by double standards. The Asset Quality Review was severe with banks operating in non-core countries, while medium-sized banks were either riskier or were treated severely in both exercises. The analysis leads to a puzzle: comparatively, the assessment per se led to significant adjustments for solid banks and large shortfalls for weak banks. The puzzle can be resolved by referring to the legacy of the country’s former supervisory activity and to the low level of capitalization of weak banks mostly in peripheral countries.Abbreviations: ADJ_AQR: adjustment due to the AQR; ADJ_ST: adjustment due to the ST adverse scenario; AQR: asset quality review; bps: basis points (1 bp is equal to 0.01%); bn: billion; CA: comprehensive assessment; CET1: common equity tier 1; CR: coverage ratio; CRD/CRR: capital requirements directive/capital requirements regulation; CVA: credit valuation adjustment; EBA: European Banking Authority; ECB: European Central Bank; LM test: Lagrange-multiplier test; NPE: Non-performing exposure; RWA: risk-weighted asset; SF_AQR: shortfall due to the AQR; SF_ST: shortfall due to the ST adverse scenario; SREP: supervisory review and evaluation process; SSM: single supervisory mechanism; ST: stress test; tr: trillion (one thousand of billions)

Suggested Citation

  • Emilio Barucci & Roberto Baviera & Carlo Milani, 2018. "The Comprehensive Assessment: What lessons can be learned?," The European Journal of Finance, Taylor & Francis Journals, vol. 24(15), pages 1253-1271, October.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1253-1271
    DOI: 10.1080/1351847X.2017.1414703
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    Cited by:

    1. Lukas Ahnert & Pascal Vogt & Volker Vonhoff & Florian Weigert, 2018. "The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance," Working Papers on Finance 1814, University of St. Gallen, School of Finance.
    2. Lukas Ahnert & Pascal Vogt & Volker Vonhoff & Florian Weigert, 2020. "Regulatory stress testing and bank performance," European Financial Management, European Financial Management Association, vol. 26(5), pages 1449-1488, November.
    3. Iryna Okolelova & Jacob A. Bikker, 2022. "The single supervisory mechanism: Competitive implications for the banking sectors in the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1818-1835, April.
    4. Ahnert, Lukas & Vogt, Pascal & Vonhoff, Volker & Weigert, Florian, 2020. "Regulatory stress testing and bank performance," CFR Working Papers 20-03, University of Cologne, Centre for Financial Research (CFR).
    5. Paul Konietschke & Steven Ongena & Aurea Ponte Marques, 2022. "Stress tests and capital requirement disclosures: do they impact banks' lending and risk-taking decisions?," Swiss Finance Institute Research Paper Series 22-60, Swiss Finance Institute.
    6. Christos Floros & Efstathios Karpouzis & Nikolaos Daskalakis, 2024. "Stock Markets and Stress Test Announcements: Evidence from European Banks," Economies, MDPI, vol. 12(7), pages 1-11, July.
    7. Ferretti, Riccardo & Venturelli, Valeria & Azzaretto, Alessandro, 2023. "Does individual SREP results reveal real news?," Finance Research Letters, Elsevier, vol. 57(C).
    8. Durrani, Agha & Ongena, Steven & Ponte Marques, Aurea, 2024. "Decoding market reactions: The certification role of EU-wide stress tests," Economic Modelling, Elsevier, vol. 139(C).
    9. Durrani, Agha & Ongena, Steven & Ponte Marques, Aurea, 2022. "The certification role of the EU-wide stress testing exercises in the stock market. What can we learn from the stress tests (2014-2021)?," Working Paper Series 2711, European Central Bank.
    10. Iryna Okolelova & Jacob A. Bikker, 2022. "The single supervisory mechanism: Competitive implications for the banking sectors in the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1818-1835, April.
    11. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    12. Giovanna Paladino & Zeno Rotondi, 2020. "Banking business models and risk: Findings from the ECB's comprehensive assessment," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 49(2), July.

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