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Stressed Banks? Evidence from the Largest-Ever Supervisory Review

Puriya Abbassi, Rajkamal Iyer, Jose-Luis Peydro () and Paul E. Soto

No 1178, Working Papers from Barcelona Graduate School of Economics

Abstract: Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting ECB’s asset-quality-review (AQR) and supervisory security and credit registers. After AQR announcement, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with largest impact on riskiest securities (not on riskiest credit), and immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the shed risk. AQR drives the results, not the end-of-year. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with mediumterm negative firm-level real effects (costs of supervision/safe-assets increase).

Keywords: asset quality review; stress tests; supervision; risk-masking; costs of safe assets (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 H63 L51 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac
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Working Paper: Stressed banks? Evidence from the largest-ever supervisory review (2020) Downloads
Working Paper: Stressed Banks? Evidence from the Largest-Ever Supervisory Review (2020)
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