How EU banks modelled their stress away in the 2016 EBA stress tests

a column by Friederike Niepmann and Viktors Stebunovs for VOX: CEPR’s Policy Portal

In the European Banking Authority’s EU-wide stress tests, banks project capital ratios under a hypothetical adverse scenario employing their own models, which are constrained by a common methodology set by the Authority.

This column argues that letting banks produce their own projections means they are prone to manipulation. It finds evidence that banks’ internal models are modified to lessen losses given the applicable scenarios and exposures. Without this manipulation, projected aggregate credit losses would have been up to 28% higher in the 2016 stress tests.

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