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Falling short of expectations? Stress-testing the European banking system

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  • Acharya, Viral V.
  • Steffen, Sascha

Abstract

Before the ECB takes over responsibility for overseeing Europe’s largest banks, as foreseen in the establishment of a eurozone banking union, it plans to conduct an Asset Quality Review (AQR) throughout the coming year, which will identify the capital shortfalls of these banks. This study finds that a comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks. The authors provide estimates of the capital shortfalls of banks that will be stress-tested under the AQR using publicly available data and a series of shortfall measures. Their analysis identifies which banks will most likely need capital, where a public back stop is likely to be needed and, since many countries are already highly leveraged, where an EU-wide backstop might be necessary.

Suggested Citation

  • Acharya, Viral V. & Steffen, Sascha, 2014. "Falling short of expectations? Stress-testing the European banking system," CEPS Papers 8803, Centre for European Policy Studies.
  • Handle: RePEc:eps:cepswp:8803
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    File URL: http://www.ceps.eu/system/files/No%20315%20Acharya%20%2526%20Steffen%20AQR%20StressTests.pdf
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    References listed on IDEAS

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    1. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    2. 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.
    3. 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.
    4. 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.
    5. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Claudia M. Buch & Tobias Körner & Benjamin Weigert, 2015. "Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute," Credit and Capital Markets, Credit and Capital Markets, vol. 48(1), pages 11-49.
    2. Bonczek, Thomas & Fuest, Clemens & Schröder, Michael, 2014. "Who is afraid of the Asset Quality Review? Potential losses and capital shortfalls in the European banking system," Frankfurt School - Working Paper Series 213, Frankfurt School of Finance and Management.
    3. Arnould, Guillaume & Dehmej, Salim, 2016. "Is the European banking system robust? An evaluation through the lens of the ECB׳s Comprehensive Assessment," International Economics, Elsevier, vol. 147(C), pages 126-144.
    4. Guillaume Arnould & Catherine Bruneau & Zhun Peng, 2015. "Liquidity and Equity Short term fragility: Stress-tests for the European banking system," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01254729, HAL.
    5. Guillaume Arnould & Salim Dehmej, 2015. "Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment," Documents de travail du Centre d'Economie de la Sorbonne 15061, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    6. Sahin, Cenkhan & de Haan, Jakob, 2016. "Market reactions to the ECB’s Comprehensive Assessment," Economics Letters, Elsevier, vol. 140(C), pages 1-5.
    7. Steffen, Sascha, 2014. "Robustness, validity, and significance of the ECB's asset quality review and stress test exercise," SAFE White Paper Series 23, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    8. Salleo, Carmelo & Homar, Timotej & Kick, Heinrich, 2016. "Making sense of the EU wide stress test: a comparison with the SRISK approach," Working Paper Series 1920, European Central Bank.
    9. Haavio, Markus & Ripatti, Antti & Takalo, Tuomas, 2016. "Saving Wall Street or main street," Research Discussion Papers 12/2016, Bank of Finland.
    10. Kevin Dowd, 2015. "Central Bank Stress Tests: Mad, Bad, and Dangerous," Cato Journal, Cato Journal, Cato Institute, vol. 35(3), pages 507-524, Fall.
    11. repec:hal:journl:halshs-01222489 is not listed on IDEAS

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