The Comprehensive Assessment: What lessons can be learned?

Emilio Barucci · Roberto Baviera · Carlo Milani

16 citations0/0 files storedEuropean Journal of Finance

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Banking stability, regulation, efficiency Credit Risk and Financial Regulations Global Financial Regulation and Crises

Abstract

Analysing the database made available by the European Central Bank and by the European Banking Authority, we evaluate the Comprehensive Assessment (CA) (Asset Quality Review and Stress Test (ST)) of banks carried out in 2014. In a nutshell, the main results are: (i) risk-adjusted capital ratios are negatively related to the Asset Quality Review shortfall, but not to the ST shortfall, whereas the leverage ratio plays a significant role in both cases; (ii) the CA predominantly concentrated on traditional credit activity rather than on banks’ financial assets and (iii) the CA seems to be characterized by double standards. The Asset Quality Review was severe with banks operating in non-core countries, while medium-sized banks were either riskier or were treated severely in both exercises. The analysis leads to a puzzle: comparatively, the assessment per se led to significant adjustments for solid banks and large shortfalls for weak banks. The puzzle can be resolved by referring to the legacy of the country’s former supervisory activity and to the low level of capitalization of weak banks mostly in peripheral countries.Abbreviations: ADJ_AQR: adjustment due to the AQR; ADJ_ST: adjustment due to the ST adverse scenario; AQR: asset quality review; bps: basis points (1 bp is equal to 0.01%); bn: billion; CA: comprehensive assessment; CET1: common equity tier 1; CR: coverage ratio; CRD/CRR: capital requirements directive/capital requirements regulation; CVA: credit valuation adjustment; EBA: European Banking Authority; ECB: European Central Bank; LM test: Lagrange-multiplier test; NPE: Non-performing exposure; RWA: risk-weighted asset; SF_AQR: shortfall due to the AQR; SF_ST: shortfall due to the ST adverse scenario; SREP: supervisory review and evaluation process; SSM: single supervisory mechanism; ST: stress test; tr: trillion (one thousand of billions)

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References

2011The Credit Crisis Around the Globe: Why Did Some Banks Perform Better?2012Accounting discretion, loan loss provisioning, and discipline of Banks’ risk-taking 2010Bank Capital: Lessons from the Financial Crisis 2012Bank valuation and accounting discretion during a financial crisis 2013Predicting distress in European banks 2011Assessing TARP 2014Testing macroprudential stress tests: The risk of regulatory risk weights 2014The manipulation of basel risk-weights

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2018The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance

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