The disciplining effect of supervisory scrutiny in the EU-wide stress test
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Since the financial crisis, stress tests have become an important supervisory and financial stability tool. Against this background, a question is whether stress tests contribute to financial stability by promoting risk reduction in the banking sector as recent evidence suggests. Stress tests offer deep insights into banks’ vulnerabilities to supervisors and the public through an intense supervisory process. In a recent paper, we show that higher supervisory scrutiny led to a disciplining effect for banks that were part of the 2016 EU-wide stress test, coordinated by the European Banking Authority (EBA) and conducted by the European Central Bank (ECB).