The disciplining effect of supervisory scrutiny in the EU-wide stress test

Christoffer Kok, Carola Müller, Steven Ongena and Cosimo Pancaro

Journal of Financial Intermediation, 2023, vol. 53, issue C

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)
JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: The Disciplining Effect of Supervisory Scrutiny in the EU-Wide Stress Test (2022)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:53:y:2023:i:c:s1042957322000687

DOI: 10.1016/j.jfi.2022.101015

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