IDEAS home Printed from https://ideas.repec.org/p/bfr/decfin/26.html
   My bibliography  Save this paper

Back-testing European stress tests

Author

Listed:
  • B. Camara
  • P. Pessarossi
  • T. Philippon

Abstract

We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks’ estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks’ losses and compare them to actual losses. We find that stress tests are informative. Model-based losses are good predictors of realized losses and of banks’ equity returns around announcements of macroeconomic news. When we perform our tests for the Union as a whole, we do not detect biases in the construction of the scenarios, or in the estimated losses across banks of different sizes and ownership structures. There is, however, some evidence that exposures are underestimated in countries with ex-ante weaker banking systems. Our results have implications for the modeling of credit losses, quality controls of supervision, and the political economy of financial regulation.

Suggested Citation

  • B. Camara & P. Pessarossi & T. Philippon, 2017. "Back-testing European stress tests," Débats économiques et financiers 26, Banque de France.
  • Handle: RePEc:bfr:decfin:26
    as

    Download full text from publisher

    File URL: https://acpr.banque-france.fr/fileadmin/user_upload/acp/publications/Debats_economiques_et_financiers/20170117-back-testing-european-stress-tests.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fernandes, Marcelo & Igan, Deniz & Pinheiro, Marcelo, 2020. "March madness in Wall Street: (What) does the market learn from stress tests?," Journal of Banking & Finance, Elsevier, vol. 112(C).
    2. ., 2014. "Innovation and authenticity in Islamic finance," Chapters, in: Morality and Justice in Islamic Economics and Finance, chapter 6, pages 163-192, Edward Elgar Publishing.
    3. Miguel Faria-e-Castro & Joseba Martinez & Thomas Philippon, 2017. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1683-1707.
    4. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2017. "Measuring Systemic Risk," Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 2-47.
    5. Acharya, Viral & Engle, Robert & Pierret, Diane, 2014. "Testing macroprudential stress tests: The risk of regulatory risk weights," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 36-53.
    6. Joel Shapiro & David Skeie, 2015. "Information Management in Banking Crises," Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2322-2363.
    7. Flannery, Mark & Hirtle, Beverly & Kovner, Anna, 2017. "Evaluating the information in the federal reserve stress tests," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 1-18.
    8. ., 2014. "Land and local government finance," Chapters, in: China’s Urbanization and the World Economy, chapter 5, pages 41-55, Edward Elgar Publishing.
    9. Jean Yves MOISSERON & Bruno Laurent MOSCHETTO & Frédéric TEULON, 2014. "Islamic finance: a review of the literature," Working Papers 2014-93, Department of Research, Ipag Business School.
    10. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    11. Jeremy C. Stein, 2014. "Regulating Large Financial Institutions," MIT Press Book Chapters, in: What Have We Learned? Macroeconomic Policy After the Crisis, edition 1, volume 1, chapter 10, pages 135-142, The MIT Press.
    12. Hamid, 2014. "Bank deregulation and relative wages in finance," Applied Economics Letters, Taylor & Francis Journals, vol. 21(2), pages 69-74, January.
    13. Noor Md. Rahmatullah & Abu Zafar Ahmed Mukul & Mohammad Tanjimul Islam, 2014. "Visiting SME Financing Industry of Bangladesh," Review of Knowledge Economy, Conscientia Beam, vol. 1(1), pages 6-20.
    14. Schuermann, Til, 2016. "Stress Testing in Wartime and in Peacetime," Working Papers 16-01, University of Pennsylvania, Wharton School, Weiss Center.
    15. repec:ipg:wpaper:2014-571 is not listed on IDEAS
    16. ., 2014. "Challenges facing the Islamic financial industry," Chapters, in: Morality and Justice in Islamic Economics and Finance, chapter 7, pages 193-238, Edward Elgar Publishing.
    17. Nicky J. Welton & Howard H. Z. Thom, 2015. "Value of Information," Medical Decision Making, , vol. 35(5), pages 564-566, July.
    18. Bertrand Candelon & Mr. Amadou N Sy, 2015. "How Did Markets React to Stress Tests?," IMF Working Papers 2015/075, International Monetary Fund.
    19. Petrella, Giovanni & Resti, Andrea, 2013. "Supervisors as information producers: Do stress tests reduce bank opaqueness?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5406-5420.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stéphane Loisel, 2014. "Reevaluation of the capital charge in insurance after a large shock: empirical and theoretical views," Post-Print hal-02013669, HAL.
    2. Tirupam Goel & Isha Agarwal, 2021. "Limits of stress-test based bank regulation," BIS Working Papers 953, Bank for International Settlements.
    3. Niepmann, Friederike & Stebunovs, Viktors, 2018. "Modeling Your Stress Away," CEPR Discussion Papers 12624, C.E.P.R. Discussion Papers.
    4. Stéphane Loisel, 2014. "Reevaluation of the capital charge in insurance after a large shock: empirical and theoretical views," Post-Print hal-02013669, HAL.
    5. Haselmann, Rainer & Wahrenburg, Mark, 2018. "How demanding and consistent is the 2018 stress test design in comparison to previous exercises? Banking union scrutiny," SAFE White Paper Series 54, Leibniz Institute for Financial Research SAFE.
    6. Wang, Zheqi & Crook, Jonathan & Andreeva, Galina, 2020. "Reducing estimation risk using a Bayesian posterior distribution approach: Application to stress testing mortgage loan default," European Journal of Operational Research, Elsevier, vol. 287(2), pages 725-738.
    7. 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.
    8. Sahin, Cenkhan & de Haan, Jakob & Neretina, Ekaterina, 2020. "Banking stress test effects on returns and risks," Journal of Banking & Finance, Elsevier, vol. 117(C).
    9. Cecilia Parlatore, 2018. "Designing Stress Scenarios," 2018 Meeting Papers 1090, Society for Economic Dynamics.
    10. Kleszcz Klaudia & Nehrebecka Natalia, 2020. "Financial liability stress tests: an approach based on the use of a rating migration matrix," Central European Economic Journal, Sciendo, vol. 7(54), pages 12-32, January.
    11. Luca Guerrieri & Michele Modugno, 2021. "The Information Content of Stress Test Announcements," Finance and Economics Discussion Series 2021-012, Board of Governors of the Federal Reserve System (U.S.).
    12. David M. Arseneau, 2020. "How Would U.S. Banks Fare in a Negative Interest Rate Environment?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 269-308, October.
    13. Robert McKeown, 2017. "How Vulnerable Is The Canadian Banking System To Fire-sales?," Working Paper 1381, Economics Department, Queen's University.
    14. Eric Monnet, & Angelo Riva, & Stefano Ungaro., 2021. "The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931) [Les effets réels des ruées bancaires : l’exemple de la Grande Dépression en France (1930-1931)]," Débats économiques et financiers 37, Banque de France.
    15. Ramadiah, Amanah & Fricke, Daniel & Caccioli, Fabio, 2022. "Backtesting macroprudential stress tests," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    16. 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).
    17. J. Hombert & V. Lyonnet, 2017. "Intergenerational Risk Sharing in Life Insurance: Evidence from France," Débats économiques et financiers 30, Banque de France.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cecilia Parlatore, 2018. "Designing Stress Scenarios," 2018 Meeting Papers 1090, Society for Economic Dynamics.
    2. Goldstein, Itay & Leitner, Yaron, 2018. "Stress tests and information disclosure," Journal of Economic Theory, Elsevier, vol. 177(C), pages 34-69.
    3. Cortés, Kristle R. & Demyanyk, Yuliya & Li, Lei & Loutskina, Elena & Strahan, Philip E., 2020. "Stress tests and small business lending," Journal of Financial Economics, Elsevier, vol. 136(1), pages 260-279.
    4. Nicola Cetorelli & Linda S. Goldberg, 2016. "Organizational Complexity and Balance Sheet Management in Global Banks," NBER Working Papers 22169, National Bureau of Economic Research, Inc.
    5. Mills, A., 2015. "Universal Health Coverage: The Holy Grail?," Monographs, Office of Health Economics, number 001571.
    6. Orlov, Dmitry & Zryumov, Pavel & Skrzypacz, Andrzej, 2017. "Design of Macro-prudential Stress Tests," Research Papers 3548, Stanford University, Graduate School of Business.
    7. Karwowski, Mariusz, 2016. "The risk in using financial reports in the study of airline business models," Journal of Air Transport Management, Elsevier, vol. 55(C), pages 185-192.
    8. Pacicco, Fausto & Vena, Luigi & Venegoni, Andrea, 2020. "Communication and financial supervision: How does disclosure affect market stability?," Journal of Empirical Finance, Elsevier, vol. 57(C), pages 1-15.
    9. Beverly Hirtle & Anna Kovner, 2020. "Bank Supervision," Staff Reports 952, Federal Reserve Bank of New York.
    10. Sahin, Cenkhan & de Haan, Jakob & Neretina, Ekaterina, 2020. "Banking stress test effects on returns and risks," Journal of Banking & Finance, Elsevier, vol. 117(C).
    11. D. Georgoutsos & G. Moratis, 2021. "On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(4), pages 977-1008, November.
    12. Nguyen, Thach Vu Hong & Ahmed, Shamim & Chevapatrakul, Thanaset & Onali, Enrico, 2020. "Do stress tests affect bank liquidity creation?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    13. 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).
    14. Thomas Ian Schneider & Philip E. Strahan & Jun Yang, 2020. "Bank Stress Testing: Public Interest or Regulatory Capture?," NBER Working Papers 26887, National Bureau of Economic Research, Inc.
    15. 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.
    16. Lazzari, Valter & Vena, Luigi & Venegoni, Andrea, 2017. "Stress tests and asset quality reviews of banks: A policy announcement tool," Journal of Financial Stability, Elsevier, vol. 32(C), pages 86-98.
    17. Maria Rosa Borges & José Zorro Mendes & André Pereira, 2019. "The Value of Information: The Impact of European Union Bank Stress Tests on Stock Markets," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(4), pages 429-444, November.
    18. Dissem, Sonia & Lobez, Frederic, 2020. "Correlation between the 2014 EU-wide stress tests and the market-based measures of systemic risk," Research in International Business and Finance, Elsevier, vol. 51(C).
    19. Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
    20. Fernandes, Marcelo & Igan, Deniz & Pinheiro, Marcelo, 2020. "March madness in Wall Street: (What) does the market learn from stress tests?," Journal of Banking & Finance, Elsevier, vol. 112(C).

    More about this item

    Keywords

    stress test; credit losses; back-testing.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G2 - Financial Economics - - Financial Institutions and Services
    • N2 - Economic History - - Financial Markets and Institutions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bfr:decfin:26. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/bdfgvfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael brassart (email available below). General contact details of provider: https://edirc.repec.org/data/bdfgvfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.