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Regulatory stress tests and bank responses

Author

Listed:
  • Karel Janda
  • Oleg Kravtsov

Abstract

In this paper, we investigate how the regulatory stress test framework in the European Union affects banks’ investment decisions and portfolio choices. Using the causal inference and event study methodology, we document a substantial impact of EU-wide stress tests in 2011, 2014 and 2016 on the banks’ portfolio strategies. The banks subject to regulatory stress tests tend to structure their portfolios with lower risk assets that is reflected in a decline in risk-weighted assets as compared to the control group. At the same time, the dynamic of realized risk that is measured by the proportion of non-performing exposure in portfolios remains unaffected. The estimates based on two alternative subsamples indicate that the magnitude of such effect rise with the increase in the size of the bank´s assets.

Suggested Citation

  • Karel Janda & Oleg Kravtsov, 2020. "Regulatory stress tests and bank responses," CAMA Working Papers 2020-77, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2020-77
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2020-08/77_2020_janda_kravtsov.pdf
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    Cited by:

    1. Frick, Bernd & Mainus, David & Schumacher, Paul, 2020. "Die Auswirkungen von COVID-19 auf die Transferaktivitäten der Fußballvereine der fünf europäischen Top-Ligen im Sommer 2020," HWWI Policy Papers 130, Hamburg Institute of International Economics (HWWI).
    2. Carrai, Maria Adele, 2021. "Adaptive governance along Chinese-financed BRI railroad megaprojects in East Africa," World Development, Elsevier, vol. 141(C).
    3. Liu, Jielun & Ong, Ghim Ping & Pang, Vincent Junxiong, 2022. "Modelling effectiveness of COVID-19 pandemic control policies using an Area-based SEIR model with consideration of infection during interzonal travel," Transportation Research Part A: Policy and Practice, Elsevier, vol. 161(C), pages 25-47.

    More about this item

    Keywords

    regulatory stress test; capital regulation; heterogeneous treatment effect; event study; instrumental variable;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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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