Stressed Banks? Evidence from the Largest-Ever Supervisory Review

• Authors: Paul E. Soto, Rajkamal Iyer, Puriya Abbassi and José-Luis Peydró.
• BSE Working Paper: 1178 | May 20
• Keywords: supervision , asset quality review , stress tests , risk-masking , costs of safe assets
• JEL codes: E58, G21, G28, H63, L51
• supervision
• asset quality review
• stress tests
• risk-masking
• costs of safe assets

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