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Stress tests and capital requirement disclosures: do they impact banks' lending and risk-taking decisions?

Author

Listed:
  • Paul Konietschke

    (European Central Bank (ECB))

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • Aurea Ponte Marques

    (European Central Bank (ECB))

Abstract

How do banks respond to changes in capital requirements as a result of the stress tests? Does the disclosure of stress test results matter? To answer these questions, we study the impact of European stress tests on banks' lending, their corresponding risk-taking, the ensuing effect on their profitability and the respective publication effect. Exploiting the centralised European stress tests in conjunction with two unique confidential databases containing (i) stress test information for the 2016 and 2018 exercises covering a total of 93 and 87 banks, respectively; and (ii) quarterly supervisory information on approximately 1,000 banks (stress-tested and non-tested), allow us to implement a dynamic difference-in-differences strategy for a comparable sample of banks. We find that banks participating in the stress tests reallocate credit away from riskier borrowers and towards safer ones in the household sector, making them in general safer but also less profitable. This is especially the case for the set of banks part of the Supervisory Review and Evaluation Process with undisclosed stress tests, which were also not disclosing their Pillar 2 Requirements voluntarily. Our results confirm that the publication of capital requirements can have a disciplinary effect since banks publishing their requirements tend to have more robust capital ratios, which improves market discipline and financial stability.

Suggested Citation

  • 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.
    • Handle: RePEc:chf:rpseri:rp2260
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    Citations

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    Cited by:

    1. 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).
    2. Miguel, Faruk & Pedraza, Alvaro & Ruiz-Ortega, Claudia, 2024. "Climate-change regulations: Bank lending and real effects," Journal of Financial Stability, Elsevier, vol. 70(C).
    3. 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.
    4. Budnik, Katarzyna & Ponte Marques, Aurea & Giglio, Carla & Grassi, Alberto & Durrani, Agha & Figueres, Juan Manuel & Konietschke, Paul & Le Grand, Catherine & Metzler, Julian & Población García, Franc, 2024. "Advancements in stress-testing methodologies for financial stability applications," Occasional Paper Series 348, European Central Bank.
    5. Ahmed, Kasim & Calice, Giovanni, 2024. "The effects of the EBA's stress testing framework on banks' lending," Economic Modelling, Elsevier, vol. 132(C).

    More about this item

    Keywords

    Stress-testing; Credit supply; Profitability; Financial stability; Market discipline;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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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