Stress tests on european banks: determinants of banking failure

• Autor(a) principal: Silva, Pedro Miguel dos Santos
• Data de Publicação: 2018
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/17072
• topic: Bank distress; Risk; Stress tests; Supervision; Finanças; Banco; Falência; Risco; Supervisão; Stress; Europa

Banks are very unique entities essential to the actual society, since generally every single individual needs one at least once in his life. Besides being a rare event, banking failures consequences are quite dramatic do society. A bank failure is different from a non-financial corporation failure, since the impact to society is bigger. With a bank failure, arises the possibility of a contagion effects and the possibility of destruction of clients’ trust in the whole sector. Banks are also the main financing source of both families and companies. Stress tests started to be executed by large financial institutions to trading books, in order to assess their potential losses under extremely adverse market conditions. The emergence of several crises, namely the recent sovereign debt crisis, changed stress tests from a small-scale exercise to a bigger-scale exercise and gave them an important role in policy. This dissertation identifies the determinants of stress tests results in Europe. To achieve this goal, a Pooled Logit model was estimated with stress tests results as dependent variable and using as explanatory variables bank specific variables, like financial ratios, and macroeconomic variables of the bank’s home country. The results showed that both financial and macroeconomic variables influence the probability of stress tests failure. However, with the overcoming of the economic crises that haunted Europe in the last decade, and with the growth of banking regulation/supervision, the probability of a European bank failing stress tests and consequently having problems that could cause bankruptcy, has decreased.