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Assessing the financial and informational role of supervisory stress tests: EU-wide 2018 stress test vis-à-vis EU-wide 2021 stress test

Dimitrios Karakostas (Department of Accounting and Finance, University of Thessaly, Larissa, Greece)
Ioannis Tsakalos (Department of Accounting and Finance, University of Thessaly, Larissa, Greece)
Athanasios Fassas (Department of Accounting and Finance, University of Thessaly, Larissa, Greece)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 3 February 2023

Issue publication date: 1 August 2023

176

Abstract

Purpose

The supervisory stress test evaluates the capital adequacy and profit-generation capacity of systemic banking institutions under baseline and adverse macroeconomic scenarios. This study aims to assess the financial and informational role of European stress tests and substantiate the impact of their disclosures by examining the EU-wide 2018 stress test vis-à-vis the EU-wide 2021 stress test in terms of how and to what extent the stock prices of the stress-tested banks have been affected.

Design/methodology/approach

This study applies standard event study methodologies to evaluate the reactions of market participants during the EU-wide 2018 and 2021 stress test exercises. We examine several “large” events in both the exercises for a selected sample of European banks.

Findings

The results of our event study analysis show that the EU-wide 2018 and 2021 stress tests come subsequent to considerable abnormal price movements. The announcement of stress test results triggered tangible investor reactions, indicating the informational value of stress tests in reducing bank opacity. This supervisory “toolkit” is considered extremely important, as it provides meaningful insights to the supervisors of the banking institutions and the market stakeholders by improving the transparency of the financial sector, allowing them to segregate banks more effectively.

Originality/value

This study constitutes one of the earliest attempts to shed light on the financial and information role of the European supervisory stress tests by comparing the EU-wide 2018 and the EU-wide 2021 stress test exercises. Moreover, it provides concrete empirical evidence and qualitative analysis to explore certain aspects of the European and US stress tests.

Keywords

Citation

Karakostas, D., Tsakalos, I. and Fassas, A. (2023), "Assessing the financial and informational role of supervisory stress tests: EU-wide 2018 stress test vis-à-vis EU-wide 2021 stress test", Journal of Financial Regulation and Compliance, Vol. 31 No. 4, pp. 397-419. https://doi.org/10.1108/JFRC-06-2022-0075

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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