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Do Capital Adequacy and Credit Quality Affect Systematic Risk? Investigation of a Sample of European Listed Banks in Light of EBA Stress Tests

Author

Listed:
  • Stefano Miani

    (Banking and Finance, University of Udine, Udine, Italy)

  • Josanco Floreani

    (Banking and Finance, University of Udine, Udine, Italy)

  • Andrea Paltrinieri

    (Banking and Finance, University of Udine, Udine, Italy)

Abstract

Based on a sample of 59 European listed banks, we employ an event study analysis to investigate the impact of the European Banking Authority (EBA) stress tests on systematic risk measured by market betas. We further investigate the drivers of systematic risk taking into account bank-specific variables, which include credit quality, accounting policies, bank loan loss provisions (LLPs) and capital ratios, along with supervisory assessments of bank vulnerability to stressed scenarios. Finally, we assess the impact of credit quality and capital adequacy variables on the systematic risk associated with growth opportunities.Our results suggest that stress tests act as a credible anchor to market expectations leading betas to decline. The effect is more pronounced for banks involved in multiple stress tests over time. Our second finding shows a significant and positive impact of Tier 1 capital ratios on betas, i.e., higher capitalization levels contribute to reducing the exposure to systematic risk. Moreover, market betas are responsive to bank vulnerability to stress scenario, in particular, regarding asset riskiness. Finally, betas of growth opportunities are affected by provisioning policies in the sense that conservative provisioning policies impair the ability to invest in growing assets.

Suggested Citation

  • Stefano Miani & Josanco Floreani & Andrea Paltrinieri, 2018. "Do Capital Adequacy and Credit Quality Affect Systematic Risk? Investigation of a Sample of European Listed Banks in Light of EBA Stress Tests," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 1-31, December.
    • Handle: RePEc:wsi:qjfxxx:v:08:y:2018:i:04:n:s2010139218400062
    DOI: 10.1142/S2010139218400062
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