Article: On the key drivers of capital depletion in the EU-wide stress tests Journal: International Journal of Banking, Accounting and Finance (IJBAAF) 2024 Vol.14 No.2 pp.151 - 177 Abstract: We aim to identify the key drivers of capital depletion under the adverse scenario by reverse engineering the EU-wide stress tests. Our sample consists of the banks that participated in the 2016, 2018 and 2021 EU-wide stress tests. We use three separate sets of variables, namely the bank-specific indicators, the macroeconomic parameters and the banks' exposures per loan portfolio. The results demonstrate that banks that are more profitable, more efficient, smaller, more exposed to corporate clients, less exposed to governments and having booked more impairments beforehand experience lower capital depletion under the adverse scenario. In addition, high rates of inflation imply more severe capital reductions, while high GDP leads to mild capital depletion. The asset mix on banks' balance sheets significantly affects the impact of stress test under the adverse scenario. Results are robust to alternative econometric approaches and provide important implications for both supervisors and banks. Inderscience Publishers - linking academia, business and industry through research

Title: On the key drivers of capital depletion in the EU-wide stress tests

Authors: Efstathios Sarantinos; Dimitris Kenourgios; John Hlias Plikas

Addresses: Department of Economics, National and Kapodistrian University of Athens, Athens, Greece ' Department of Economics and UoA Center for Financial Studies, National and Kapodistrian University of Athens, Athens, Greece; Department of Economics, School of Economics and Political Sciences, National and Kapodistrian University of Athens, 1, Sofokleous Str., Office 512,GR-10559 Athens, Greece ' Department of Economics and UoA Center for Financial Studies, National and Kapodistrian University of Athens, Athens, Greece

Abstract: We aim to identify the key drivers of capital depletion under the adverse scenario by reverse engineering the EU-wide stress tests. Our sample consists of the banks that participated in the 2016, 2018 and 2021 EU-wide stress tests. We use three separate sets of variables, namely the bank-specific indicators, the macroeconomic parameters and the banks' exposures per loan portfolio. The results demonstrate that banks that are more profitable, more efficient, smaller, more exposed to corporate clients, less exposed to governments and having booked more impairments beforehand experience lower capital depletion under the adverse scenario. In addition, high rates of inflation imply more severe capital reductions, while high GDP leads to mild capital depletion. The asset mix on banks' balance sheets significantly affects the impact of stress test under the adverse scenario. Results are robust to alternative econometric approaches and provide important implications for both supervisors and banks.

Keywords: bank stress tests; adverse scenario; capital depletion; banking sector; European Union.

DOI: 10.1504/IJBAAF.2024.141382

International Journal of Banking, Accounting and Finance, 2024 Vol.14 No.2, pp.151 - 177

Received: 16 Mar 2023
Accepted: 28 Mar 2024
Published online: 10 Sep 2024 *

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Title: On the key drivers of capital depletion in the EU-wide stress tests

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