Is the Comprehensive Assessment Really Comprehensive?

61 Pages Posted: 21 Dec 2014

See all articles by Emilio Barucci

Emilio Barucci

Politecnico di Milano - Department of Mathematics

Roberto Baviera

Polytechnic University of Milan - Department of Mathematics

Carlo Milani

BEM Research

Date Written: December 19, 2014

Abstract

Analyzing the database made available by the European Central Bank (ECB) we evaluate the Comprehensive Assessment (asset quality review and stress test). We provide some insights on the supervisory approach of the ECB and on banking regulation. In a nutshell the main results are: i) risk adjusted capital ratios are negatively related to the asset quality review shortfall but not to the stress test shortfall, instead the leverage ratio always plays a significant role; ii) the comprehensive assessment was mainly concentrated on the traditional credit activity rather than on the financial assets of the banks; iii) there is evidence of manipulation in the computation of risk weighted assets by the use of internal rating based models; iv) the comprehensive assessment seems to be characterized by double standards: non-core countries have been penalized by the asset quality review; medium size banks are either more risky or have been penalized in both exercises; a non diversification-home bias effect (including government bonds) has penalized banks in the asset quality review; the use of national discretion helped core countries and was not of help for peripheral countries. As far as the methodology is concerned, several pitfalls emerge. However, we show that the capital adjustment performed by the stress test is positively related to a market based risk measure (historical volatility) and that the leverage ratio post adjustment, but not before the adjustment and not the risk adjusted capital ratio, is related to it.

Keywords: bank regulation, stress test, capital, sovereign risk, European Central Bank

Suggested Citation

Barucci, Emilio and Baviera, Roberto and Milani, Carlo, Is the Comprehensive Assessment Really Comprehensive? (December 19, 2014). Available at SSRN: https://ssrn.com/abstract=2541043 or http://dx.doi.org/10.2139/ssrn.2541043

Emilio Barucci (Contact Author)

Politecnico di Milano - Department of Mathematics ( email )

Piazza Leonardo da Vinci
Milan, Milano 20100
Italy

Roberto Baviera

Polytechnic University of Milan - Department of Mathematics ( email )

P.zza L. da Vinci, 32
Milan, 20133
Italy

Carlo Milani

BEM Research ( email )

Viale Primo Maggio 86/2A
Marino (RM), 00047
Italy

HOME PAGE: http://www.bemresearch.it

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