How demanding and consistent is the 2018 stress test design in comparison to previous exercises? Banking union scrutiny

Rainer Haselmann () and Mark Wahrenburg

No 54, SAFE White Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We provide an assessment of the design and calibration of the 2018 EU-wide stress test. The adverse scenario for the 2018 stress test is more severe than for previous stress tests in terms of the assumed GDP decline in the EU area. However, the test is less severe in terms of the losses that banks are expected to incur under the scenario. The adverse scenario has a highly asymmetric impact on different European countries, such that countries with a high degree of trade openness are affected considerably more. It seems unlikely that the assumed scenario constitutes the most plausible threat scenario for the EU economy. Since banks use heterogeneous models to forecast the stress scenario impact on loan losses and since the EBA does not publish its own respective benchmark parameters, the public cannot fully assess the true severity of the test in terms of its impact on banks' capital. We argue that both the lack of transparency and the heterogeneity of banks' practices to forecast stress scenario induced losses considerably weaken the credibility of the stress test and limit its usefulness in supporting market discipline among European banks.

Keywords: Banking union; European banks; Stress test (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-eec
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewh:54

DOI: 10.2861/90233

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