Predicting European Bank Stress Tests: Survival of the Fittest

43 Pages Posted: 16 Jun 2016 Last revised: 4 Mar 2019

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Félix J. López-Iturriaga

University of Valladolid - Department of Financial Economics and Accounting; National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy

Ivan Sanz

University of Valladolid - Faculty of Economic Science and Business Studies

Date Written: November 16, 2016

Abstract

This paper tests the hypothesis that stress tests are primarily a function of the fundamental financial condition and operating environment of individual banks, rather than alternative adverse economic and financial scenarios imposed by regulators. We develop a novel early warning system based on multiple strategy ensemble methods to predict whether European banks pass stress tests in 2010, 2011 and 2014. The model is able to identify over 98 percent of failing and passing banks in the training subsample and predict about 90 percent of banks in the test validation sample. Further analyses of predictor importance and robustness compared to other competing model approaches are conducted. Our evidence supports the conclusion that, regardless of different macroeconomic scenarios, surviving stress tests depends largely on the underlying risk dimensions of individual banks.

Keywords: banking, early warning system, financial condition, systemic risk, stress test

JEL Classification: C38, C49, G21, C28

Suggested Citation

Kolari, James W. and Lopez-Iturriaga, Felix Javier and Sanz, Ivan, Predicting European Bank Stress Tests: Survival of the Fittest (November 16, 2016). Mays Business School Research Paper No. 2796459. Available at SSRN: https://ssrn.com/abstract=2796459 or http://dx.doi.org/10.2139/ssrn.2796459

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Felix Javier Lopez-Iturriaga

University of Valladolid - Department of Financial Economics and Accounting ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)

HOME PAGE: http://www2.eco.uva.es/flopez

National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy ( email )

Lebedeva,27
Perm, Perm 614070
Russia

Ivan Sanz (Contact Author)

University of Valladolid - Faculty of Economic Science and Business Studies ( email )

Avenida Valle Esgueva, 6
Valladolid
Spain

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