Falling Short of Expectations? Stress-Testing the European Banking System

25 Pages Posted: 23 Dec 2013

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Sascha Steffen

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2013

Abstract

The eurozone is mired in a recession. In 2013, the GDP of all 17 eurozone countries fell by 0.5% and the outlook for 2014 shows considerable risks across the region. To stabilize the common currency area and its (partly insolvent) financial system, a eurozone banking union is being established. An important part of the banking union is the Single Supervisory Mechanism (SSM), which will transfer the oversight of Europe’s largest banks to the European Central Bank (ECB). Before the ECB takes over this responsibility, it plans to conduct an Asset Quality Review (AQR) in 2014, which will identify the capital shortfalls of these banks. A comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks. This study provides estimates of the capital shortfalls of banks that will be stress-tested under the AQR using publicly available data and a series of shortfall measures. We document which banks will most likely need capital, where a public back-stop is likely needed, and, as many countries are already highly leveraged, where a EU-wide backstop might be necessary.

Keywords: AQR, stress tests, banking union, bail-out

JEL Classification: G01, G21, G28, G14, G15, F3

Suggested Citation

Acharya, Viral V. and Steffen, Sascha, Falling Short of Expectations? Stress-Testing the European Banking System (December 20, 2013). Available at SSRN: https://ssrn.com/abstract=2370484 or http://dx.doi.org/10.2139/ssrn.2370484

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

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

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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