Monitoring banks’ vulnerabilities using stressed depletion indices

Cyril Couaillier, Finn Faber, Rodriguez d’Acri, Costanza, Frances Shaw and Joana Passinhas

No 3295, Working Paper Series from European Central Bank

Abstract: We introduce two indicators to track the build-up of vulnerabilities in the euro area banking sector on a quarterly basis by leveraging the information collected in EU-wide solvency stress tests. First, we introduce an indicator of conditional capital depletion, the Stress Vulnerability Index (SVI), which quantifies potential losses under adverse scenarios when tail credit risk is highest. Second, we introduce an indicator of earnings vulnerability, the Profitability Vulnerability Index (PVI), which assesses the capacity of the banking sector to generate capital organically. While the two indices spike synchronously during systemic crises, they can also decouple. We show that this occurs when tail risks to capital subside but earnings remain compressed, or conversely, when recessionary fears mount while current profitability strengthens. These divergences provide actionable signals for macroprudential policy by distinguishing between the accumulation of solvency risks and the impairment of loss absorption capacity. In doing so, the indices support decisions on the activation, build-up, stability or release of prudential buffers. We validate the usefulness of the indicators by showing that both indicators were strongly associated with the probability that euro area banks received state aid in the aftermath of the Great Financial Crisis. JEL Classification: E61, G01, G21, G28

Keywords: bank capital; financial stability; stress test (search for similar items in EconPapers)
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263295

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