European bank stress test and sovereign exposures

ABSTRACT

We use an event study methodology to revisit the bank stress test conducted by the European Banking Authority in 2011. Instead of only considering the final results disclosure, we consider six key official announcements during the stress test. Our results indicate that abnormal returns reversed over the course of the stress test and that the emerging sovereign crisis contributed to the stock market perception of bank health.

KEYWORDS:

• Bank stress test
• EBA
• European banks
• sovereign exposure
• event study

JEL CLASSIFICATION:

• G21
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ http://www.reuters.com/article/2011/03/01/us-summit-finance-stresstests-idUSTRE72033W20110301.

² The CAAR for the [0, +2] window is positive for the EBA banks, but this result is entirely driven by the Irish banks, the only ones that reacted positively. The reason is probably that Ireland was perceived to be reversing its fate with its Troika-imposed restructuring plan.