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Making sense of the comprehensive assessment

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  • Acharya, Viral V.
  • Steffen, Sascha

Abstract

The European Central Bank (ECB) has finalized its comprehensive assessment of the solvency of the largest banks in the euro area and on October 26 disclosed the results of this assessment. In the present paper, Acharya and Steffen compare the outcomes of the ECB's assessment to their own benchmark stress tests conducted for 39 publically listed financial institutions that are also included in the ECB's regulatory review. The authors identify a negative correlation between their benchmark estimates for capital shortfalls and the regulatory capital shortfall, but a positive correlation between their benchmark estimates for losses under stress both in the banking book and in the trading book. They conclude that the regulatory stress test outcomes are potentially heavily affected by discretion of national regulators in measuring what is capital, and especially the use of risk-weighted assets in calculating the prudential capital requirement.

Suggested Citation

  • Acharya, Viral V. & Steffen, Sascha, 2014. "Making sense of the comprehensive assessment," SAFE Policy Letters 32, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safepl:32
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    File URL: https://www.econstor.eu/bitstream/10419/106982/1/817021035.pdf
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    References listed on IDEAS

    as
    1. Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
    2. Steffen, Sascha, 2014. "Robustness, validity, and significance of the ECB's asset quality review and stress test exercise," SAFE White Paper Series 23, Leibniz Institute for Financial Research SAFE.
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    1. An Open Letter to Randal K. Quarles, Federal Reserve Vice Chair for Supervision
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2020-06-21 18:01:15

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    Cited by:

    1. Buch, Claudia M. & Krause, Thomas & Tonzer, Lena, 2019. "Drivers of systemic risk: Do national and European perspectives differ?," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 160-176.
    2. Sahin, Cenkhan & de Haan, Jakob, 2016. "Market reactions to the ECB’s Comprehensive Assessment," Economics Letters, Elsevier, vol. 140(C), pages 1-5.
    3. Engle, Robert F. & Emambakhsh, Tina & Manganelli, Simone & Parisi, Laura & Pizzeghello, Riccardo, 2023. "Estimating systemic risk for non-listed euro-area banks," Working Paper Series 2856, European Central Bank.
    4. Sahin, Cenkhan & de Haan, Jakob, 2016. "Market reactions to the ECB’s Comprehensive Assessment," Economics Letters, Elsevier, vol. 140(C), pages 1-5.

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    Keywords

    Asset Quality Review; Single Supervisy Mechanism; European Central Bankor;
    All these keywords.

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