Discussion paper

DP11805 Backtesting European Stress Tests

We provide a first evaluation of the quality of banking stress tests in the European Union.
We use stress tests scenarios and banks’ estimated losses to recover bank level exposures
to macroeconomic factors. Once macro outcomes are realized, we predict banks’ losses and
compare them to actual losses. We find that stress tests are informative and unbiased on
average. Model-based losses are good predictors of realized losses and of banks’ equity returns
around announcements of macroeconomic news. When we perform our tests for the Union as
a whole, we do not detect biases in the construction of the scenarios, or in the estimated losses
across banks of different sizes and ownership structures. There is, however, some evidence
that exposures are underestimated in countries with ex-ante weaker banking systems. Our
results have implications for the modeling of credit losses, quality controls of supervision, and
the political economy of financial regulation.

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Citation

Philippon, T (2017), ‘DP11805 Backtesting European Stress Tests‘, CEPR Discussion Paper No. 11805. CEPR Press, Paris & London. https://cepr.org/publications/dp11805