Large Scale Supervisory Assessment of Banks: Where Is the Beef?

Abstract

It is common practice in the supervision of regulated banks to perform and disclose a simultaneous standardized assessment of their asset quality, organizational effectiveness, strategic viability and resilience to financial turmoil. Investigating the ECB 2014 Comprehensive Assessment and the subject banks’ stock price reactions, we find that this process provides limited assistance to the market in sorting good banks from bad banks. Notwithstanding, the market adjusts to these findings, since it understands that they signal the stance of supervisory policy towards banking activities, which begets the level of regulatory risk and cost for the supervised banks.

Keywords: Stress Test, Banking Supervision, Policy Signaling, Event Study, ECB

JEL Classification: G01, G14, G21, G28