The impact of stress testing result disclosure on participating banks

Abstract

With increased market turmoil faced in recent years, bank regulators and supervisors are imposing stricter capital requirements on banks. Stress testing is a tool that enables regulators, supervisors and banks alike to gauge the whether the bank has an adequate amount of capital to withstand possible adverse scenarios. This tool generally places a greater emphasis on highly adverse scenarios, thereby allowing supervisors to have a better view of the tail (especially fat tail) risks of the bank. This dissertation examines the impact the 2014 EU stress test on bank equity prices. An event study is used having as events the announcement (31st January 2014) as well as the publication of results (26th October 2014). The aim of the study is to assess whether the publication of the stress testing results impacted the equity prices. .The study also analyses whether there were any spill-over effects on banks that were not included in the tested sample.