Working Paper: CEPR ID: DP16157
Authors: Christoffer Kok; Carola M"uller; Steven Ongena; Cosimo Pancaro
Abstract: Using a difference-in-differences approach and relying on confidential supervisory data and an unique proprietary data set available at the European Central Bank related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutinyassociated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutinythat measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise.
Keywords: stress testing; credit risk; internal models; banking supervision; banking regulation
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supervisory scrutiny associated with the 2016 EU-wide stress test (G28) | bank risk (G21) |
| banks participating in the stress test (G21) | reduced risk-weighted asset density (RWAD) (G32) |
| tighter scrutiny from supervisors during the stress test (G28) | reduction in risk-weighted asset density (RWAD) (G32) |
| intensity of supervisory scrutiny (D73) | greater reductions in credit risk (G32) |
| changes in capital requirements (G28) | changes in bank risk (G21) |