The Disciplining Effect of Supervisory Scrutiny in the EU-Wide Stress Test

Cosimo Pancaro, Christoffer Kok, Carola Müller and Steven Ongena

No 22-59, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Relying on confidential supervisory data related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated 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 scrutiny that 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. We also find that a strong risk management culture is a prerequisite for the supervisory scrutiny to be effective. Finally, we show that a similar disciplining effect is not exerted neither by higher capital charges nor by more transparency and related market discipline induced by the stress test.

Keywords: Stress Testing; Credit risk; Internal Models; Banking Supervision; banking regulation (search for similar items in EconPapers)
Pages: 66 pages
Date: 2022-08
New Economics Papers: this item is included in nep-ban, nep-eec and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4179529 (application/pdf)

Related works:
Journal Article: The disciplining effect of supervisory scrutiny in the EU-wide stress test (2023)
Working Paper: The disciplining effect of supervisory scrutiny in the EU-wide stress test (2021)
Working Paper: The disciplining effect of supervisory scrutiny in the EU-wide stress test (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2259

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().