Backtesting European Stress Tests

39 Pages Posted: 23 Jan 2017 Last revised: 27 Jan 2023

See all articles by Thomas Philippon

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Pierre Pessarossi

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR)

Boubacar Camara

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

Abstract

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.

Suggested Citation

Philippon, Thomas and Pessarossi, Pierre and Camara, Boubacar, Backtesting European Stress Tests (January 2017). NBER Working Paper No. w23083, Available at SSRN: https://ssrn.com/abstract=2903784

Thomas Philippon (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre Pessarossi

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR) ( email )

Paris
France

Boubacar Camara

French Banking Supervisory Authority - Autorité de Contrôle Prudentiel et de Résolution (ACPR) ( email )

Paris
France

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