Bank Stress Tests and Accounting Discretion

Posted: 11 May 2020

See all articles by Dimitrios Gounopoulos

Dimitrios Gounopoulos

University of Bath

Nikolaos I. Papanikolaou

Newcastle University

C. Zopounidis

Technical University of Crete (TUC) - Department of Production Engineering and Management

Date Written: April 15, 2020


We examine stress tests through the lenses of an implicit, underlying incentives mechanism for bank managers to exercise accounting discretion. Our research aim and the relevant components are examined in defined steps by reference to Propensity Score Matching analysis, which is paired with a Difference-in-Difference approach, and a fixed effects regression model. Our findings show that larger banks with an asset portfolio of relatively low quality, reduced profitability, and higher exposure to market-based activities are more likely to be stress tested. Stress tests exacerbate the effort of tested banks to recapitalize their balance sheet and improve their risk profiles. However, they do not significantly affect the key tools that bank managers use to apply accounting discretion. In this vein, tested banks are highly engaged in accounting discretion over loan loss provisions to manage both income and capital figures. Banks with low capital adequacy are found to apply discretionary practices to a greater extent. Moreover, the banks that participated in early stress tests appear to engage in accounting discretion to a higher degree compared to those participated in some later exercise, which reveals an upward movement on the regulatory learning curve. Our results also show that stricter regulatory rules, more robust supervisory regimes, and more transparent economies mitigate the impact that stress tests have on the incentives of the managers of tested banks to exercise accounting discretion even though the relevant incentives cannot be eliminated.

Keywords: OR in Banking; Bank Stress Tests; Managerial Incentives; Financial Reporting; Data Reliability

JEL Classification: C44; G01; G21; M41

Suggested Citation

Gounopoulos, Dimitrios and Papanikolaou, Nikolaos I. and Zopounidis, Constantin, Bank Stress Tests and Accounting Discretion (April 15, 2020). Available at SSRN:

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

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

Nikolaos I. Papanikolaou

Newcastle University ( email )

5 Barrack Road
Devonshire Building
United Kingdom
+441912082197 (Phone)

HOME PAGE: http://

Constantin Zopounidis

Technical University of Crete (TUC) - Department of Production Engineering and Management ( email )

University Campus
Crete, 73100
+30 28210 37236 (Phone)
+30 28210 69410, 37236 (Fax)

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