Working Paper: CEPR ID: DP18045
Authors: Puriya Abbassi; Rajkamal Iyer; Jos Luis Peydr; Paul Soto
Abstract: We study short-term and medium-term changes in bank risk-taking as a result of supervision, and the associated real effects. For identification, we exploit the European Central Bank’s asset-quality- review (AQR) in conjunction with security and credit registers. After the AQR announcement, reviewed banks reduce riskier securities and credit supply, with the greatest effect on riskiest securities. We find negative spillovers on asset prices and firm-level credit availability. Moreover, non-banks with higher exposure to reviewed banks acquire the shed risk. After the AQR compliance, reviewed banks reload riskier securities but not riskier credit, resulting in negative medium-term firm-level real effects. These effects are especially strong for firms with high ex-ante credit risk. Among these non-safe firms, even those with high ex-ante productivity experience negative real effects. Our findings suggest that banks’ liquid assets help them to mask risk from supervisors and risk adjustments banks make in response to supervision have persistent corporate real effects
Keywords: Stress Testing; Banks; Credit Supply; Real Effects
JEL Codes: G21; E58; G28; H63; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Announcement of the AQR (C58) | Reviewed banks increased their holdings of safer securities (G21) |
| Announcement of the AQR (C58) | Reviewed banks decreased their supply of credit to riskier firms (G21) |
| Announcement of the AQR (C58) | Negative spillovers on asset prices (G19) |
| Announcement of the AQR (C58) | Impact on firm-level credit availability (F65) |
| Reviewed banks increased their holdings of safer securities (G21) | Reviewed banks decreased their supply of credit to riskier firms (G21) |
| Announcement of the AQR (C58) | Reviewed banks increased credit to safer firms (G21) |