Stressed Banks? Evidence from the Largest-Ever Supervisory Review

52 Pages Posted: 20 Nov 2020

See all articles by Paul E. Soto

Paul E. Soto

FDIC, Division of Insurance and Research

Puriya Abbassi

Deutsche Bundesbank

Rajkamal Iyer

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

José-Luis Peydró

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2020

Abstract

Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting the European Central Bank’s asset-quality-review (AQR) and supervisory security and credit registers. After the announcement of the AQR, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with the largest impact on riskiest securities (rather than riskiest credit), and with immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the risk that reviewed banks shed. The AQR drives the results, not end-of-year effects. After the 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

Soto, Paul E. and Abbassi, Puriya and Iyer, Rajkamal and Peydro, Jose-Luis, Stressed Banks? Evidence from the Largest-Ever Supervisory Review (August 2020). FDIC Center for Financial Research Paper No. 2020-06, Available at SSRN: https://ssrn.com/abstract=3733798 or http://dx.doi.org/10.2139/ssrn.3733798

Paul E. Soto (Contact Author)

FDIC, Division of Insurance and Research ( email )

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Puriya Abbassi

Deutsche Bundesbank ( email )

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Rajkamal Iyer

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

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Jose-Luis Peydro

Imperial College London ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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

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Spain
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