The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test

65 Pages Posted: 19 May 2021

See all articles by Christoffer Kok

Christoffer Kok

European Central Bank (ECB)

Carola Müller

Center for Latin American Monetary Studies – CEMLA; Halle Institute for Economic Research

Steven Ongena

University of Zurich

Cosimo Pancaro

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2021

Abstract

Using a difference-in-differences approach and relying on confidential supervisory data and an unique proprietary data set available at the European Central Bank related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise.

JEL Classification: G11, G21, G28

Suggested Citation

Kok, Christoffer and Müller, Carola and Ongena, Steven and Pancaro, Cosimo, The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test (May 1, 2021). ECB Working Paper No. 2021/2551, Available at SSRN: https://ssrn.com/abstract=3846655 or http://dx.doi.org/10.2139/ssrn.3846655

Christoffer Kok (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carola Müller

Center for Latin American Monetary Studies – CEMLA ( email )

Durango 54, Roma Nte
06700
Mexico

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Steven Ongena

University of Zurich

Rämistrasse 71
Zürich, CH-8006
Switzerland

Cosimo Pancaro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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