Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Modeling Your Stress Away
Friederike Niepmann
Viktors Stebunovs
Abstract

We investigate systematic changes in banks' projected credit losses between the 2014 and 2016 EBA stress tests, employing methodology from Philippon et al. (2017). We find that projected credit losses were smoothed across the tests through systematic model adjustments. Those banks whose losses would have increased the most from 2014 to 2016 due to changes in the supervisory scenarios-keeping the models constant and controlling for changes in the riskiness of underlying portfolios-saw the largest decrease in losses due to model changes. Model changes were more pronounced for banks that rely more on the Internal Ratings-Based approach, and they explain the cross-section of market responses to the release of the 2016 results. Stock prices and CDS spreads increased more for banks with larger reductions in projected credit losses due to model changes, as investors apparently did not interpret lower loan losses as reflecting mainly a decrease in credit risk but, instead, as a sign of lower capital requirements going forward.


Download Full text
Cite this item
Friederike Niepmann & Viktors Stebunovs, Modeling Your Stress Away, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1232, 19 Jul 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: Stress tests ; Financial institutions ; Regulation ; Credit risk models
DOI: 10.17016/IFDP.2018.1232
For corrections, contact FRB Librarian ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal