The ECB's in-comprehensive SSM-ent: the higher they go, the harder they fall

Ravel Sami Jabbour and Nithya Sridharan

The European Journal of Finance, 2020, vol. 26, issue 15, 1506-1528

Abstract: The first ECB stress testing exercise took place in 2014 and aimed at forming a comprehensive assessment of the Eurozone banking sector resilience. The ECB's analysis of the outcome revealed that impairments and loan losses were the main causes behind the fall in participating banks' capital ratios. However, the assessment was incomprehensive in that, aside from bank size and country of origin, no further analysis was conducted to uncover other potential factors which could shed light on the predisposition of some banks to experience higher reductions in their capital ratios compared to peers. Based on the unique dataset provided by the ECB, our study reveals which characteristics of a bank's ex-ante balance-sheet position are helpful in understanding the fall in bank capital under stress. This is important for all market players to take into account when assessing banks' resilience on the basis of capital ratios. Our findings strengthen the case for combining different solvency ratios to promote financial stability as well as advocating for further international cooperation and disclosure of stress testing results.

Date: 2020
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DOI: 10.1080/1351847X.2020.1752276

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