Predicting European bank stress tests: Survival of the fittest

James W. Kolari, Félix López-Iturriaga () and Ivan Pastor Sanz

Global Finance Journal, 2019, vol. 39, issue C, 44-57

Abstract: This paper tests the hypothesis that stress tests are primarily a function of the fundamental financial condition and operating environment of individual banks, rather than alternative adverse economic and financial scenarios imposed by regulators. We develop a novel early warning system based on multiple strategy ensemble methods to predict whether European banks pass stress tests in 2010, 2011 and 2014. The model is able to identify over 98% of failing and passing banks in the training subsample and predict about 90% of banks in the test validation sample. Further analyses of predictor importance and robustness compared to other competing model approaches are conducted. Our evidence supports the conclusion that, regardless of different macroeconomic scenarios, surviving stress tests depends largely on the underlying risk dimensions of individual banks.

Keywords: Banking; Early warning system; Financial condition; Systemic risk; Stress test (search for similar items in EconPapers)
JEL-codes: C38 C49 G21 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1044028318300279
Full text for ScienceDirect subscribers only

Related works:
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:eee:glofin:v:39:y:2019:i:c:p:44-57

DOI: 10.1016/j.gfj.2018.01.015

Access Statistics for this article

Global Finance Journal is currently edited by Manuchehr Shahrokhi

More articles in Global Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().