Backtesting European Stress Tests
Pierre Pessarossi and
Thomas Philippon ()
No 11805, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks' estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks' losses and compare them to actual losses. We find that stress tests are informative and unbiased on average. Model-based losses are good predictors of realized losses and of banks' equity returns around announcements of macroeconomic news. When we perform our tests for the Union as a whole, we do not detect biases in the construction of the scenarios, or in the estimated losses across banks of different sizes and ownership structures. There is, however, some evidence that exposures are underestimated in countries with ex-ante weaker banking systems. Our results have implications for the modeling of credit losses, quality controls of supervision, and the political economy of financial regulation.
JEL-codes: E2 G2 N2 (search for similar items in EconPapers)
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Working Paper: Back-testing European stress tests (2017)
Working Paper: Backtesting European Stress Tests (2017)
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