Stressed Banks? Evidence from the Largest-Ever Supervisory Review

55 Pages Posted: 30 Apr 2020

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Paul E. Soto

FDIC, Division of Insurance and Research

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting ECB's asset-quality-review (AQR) and supervisory security and credit registers. After AQR announcement, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with largest impact on riskiest securities (not on riskiest credit), and immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the shed risk. AQR drives the results, not the end-of-year. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase).

Keywords: Asset quality review, stress tests, supervision, risk-masking, costs of safe assets

JEL Classification: E58, G21, G28, H63, L51

Suggested Citation

Abbassi, Puriya and Peydro, Jose-Luis and Iyer, Rajkamal and Soto, Paul E., Stressed Banks? Evidence from the Largest-Ever Supervisory Review (2020). Deutsche Bundesbank Discussion Paper No. 26/2020, Available at SSRN: https://ssrn.com/abstract=3605999

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Paul E. Soto

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States
202-898-6810 (Phone)

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