Title: Changes to banking behaviour in response to regulatory stress testing
Authors: Prasad Prakash Pore - National College of Ireland (Ireland)
Oisin Creaner - National College of Ireland (Ireland)
Simon Caton - National College of Ireland (Ireland) [presenting]
Abstract: The Global Financial Crisis of 2007-2011 resulted in the regulatory implementation of a standardized framework for determine the ability of banking sector to withstand a further crisis. This standardized framework, Third Basel Accord (Basel III), mainly concerns stress testing, capital adequacy requirement and market liquidity risk. With the help of different financial indicators like capital, risk profile, etc., regulatory stress testing assesses the ability of financial institutions to withstand further financial and economic crises. Changes in these indicators elucidate certain banking behavior in anticipation of, and in response to, regulatory stress testing. Using data from the 2014 stress tests results and 2013 transparency exercise conducted by EBA, we analyze 63 EU banks across 21 jurisdictions to unravel how the advent of institutional stress testing has resulted in a behavioral change within the European banking sector. Our results indicate that banks are instrumenting behavioral changes in response to Basel III. Whilst this is a positive result, it does, however, mean that more scrutiny may be required in future stress tests.