Bank Stress Tests: An Active Treatment or a Placebo?

Posted: 9 Dec 2016 Last revised: 20 Mar 2018

See all articles by Dimitrios Gounopoulos

Dimitrios Gounopoulos

University of Bath

Johannes Höbelt

University of Sussex - School of Business, Management and Economics

Nikolaos I. Papanikolaou

Bournemouth University - Business School

Date Written: September 15, 2017

Abstract

We empirically examine the quality of accounting information that authorities utilise when conducting bank stress tests and provide evidence on how this information links to the outcome of these tests. Based on a unique dataset of tested and non-tested banks from 27 European countries, we document a clear link between stress tests and accounting discretion. We find that tested banks, in contrast to their non-tested counterparts, are penalised by regulators and markets through stress tests. Consequently, this incentivises bank managers to exercise accounting discretion over loan loss provisions in order to manage both capital and earnings. Our results suggest that stress tests exacerbate banks’ discretionary behaviour with the purpose to pass stress tests and convey a sound image to regulators and market participants. This phenomenon appears to be modest under stricter institutional environment. Overall, we show that, in certain occasions, stress tests constitute a ‘placebo’ and not an active treatment.

Keywords: Bank Stress Tests; Financial Statements; Accounting Information; Accounting Discretion

JEL Classification: C12; C20; E58; G21

Suggested Citation

Gounopoulos, Dimitrios and Höbelt, Johannes and Papanikolaou, Nikolaos I., Bank Stress Tests: An Active Treatment or a Placebo? (September 15, 2017). Available at SSRN: https://ssrn.com/abstract=2882239 or http://dx.doi.org/10.2139/ssrn.2882239

Dimitrios Gounopoulos

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Johannes Höbelt

University of Sussex - School of Business, Management and Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

Nikolaos I. Papanikolaou (Contact Author)

Bournemouth University - Business School ( email )

Executive Business Centre, 89 Holdenhurst Road,
Bournemouth, BH8 8EB
United Kingdom
+44 (0) 1202 968769 (Phone)

HOME PAGE: http://staffprofiles.bournemouth.ac.uk/display/npapanikolaou

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