Are Systemically Important Eurozone Banks Undercapitalized? A Stress Testing Approach

56 Pages Posted: 24 Feb 2015 Last revised: 13 Apr 2017

Date Written: April 2017

Abstract

We stress test Eurozone banks of systemic importance by applying a historical simulation approach. The balance sheets of the sample banks represent aggregate exposure for which we calculate the impact of stress on economic capital. We obtain market and credit risk exposures from publicly available annual reports and assign appropriate risk factors to major on- and off-balance sheet positions. The sample period of risk factor returns ranges from January 2007 to December 2013. By revaluating the fair valued balance sheets on a daily basis, we calculate bank capital maximum drawdowns for different time horizons. We thereby analyze the banks' risk bearing capacity by simulating the impact of recent financial market turbulences onto the present capital base. Additionally, we compare our results to regulatory benchmarks. We find that systemically important Eurozone banks are well capitalized with respect to market risks but undercapitalized regarding credit- and counterparty risks.

Keywords: Stress testing, aggregate bank risk, bank balance sheets, financial stability, systemic risk, economic capital

JEL Classification: G18, G21, G32

Suggested Citation

Kahlert, Dennis and Wagner, Niklas F., Are Systemically Important Eurozone Banks Undercapitalized? A Stress Testing Approach (April 2017). Available at SSRN: https://ssrn.com/abstract=2568614 or http://dx.doi.org/10.2139/ssrn.2568614

Dennis Kahlert

University of Passau ( email )

Innstraße 27
Passau, 94032
Germany

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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