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Regulatory Stress Tests and Bank Responses: Heterogeneous Treatment Effect in Dynamic Settings

Karel Janda () and Oleg Kravtsov ()

International Journal of Central Banking, 2022, vol. 18, issue 2, 1-49

Abstract: We investigate how the regulatory stress-test framework in the European Union affects banks' investment decisions and portfolio choices. Using the causal inference and event-study methods, we document a substantial impact of EU-wide stress tests in 2011, 2014, and 2016 on the banks' portfolio strategies. The banks subject to regulatory stress tests tend to structure their portfolios with lower-risk assets, which is reflected in a decline in risk-weighted assets. At the same time, the dynamic of realized risk that is measured by the proportion of non-performing exposure in portfolios remains unaffected. The magnitude of such effect rises with the increase in the size of the banks' assets.

JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2022
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International Journal of Central Banking is currently edited by Loretta J. Mester

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