Banking solvency determinants in the EU: a model based on stress tests

ABSTRACT

Using a multilevel regression model, this article aims to find determinants of banking solvency in the European Union. The endogenous variable is defined as the capital ratio determined by stress tests. Both internal (financial ratios and sovereign debt exposures) and external (macroeconomic indicators) variables are proposed as covariates. The results reveal that capitalization, earnings, assets structure and exposure to PIIGS (Portugal, Italy, Ireland, Greece and Spain) sovereign debt are significant among the former, and economic growth, interest and exchange rates, and real estate prices among the latter.

KEYWORDS:

• Stress tests
• bank solvency
• tier 1
• European Union
• multilevel regression

JEL CLASSIFICATION:

• C21
• G21
• G28

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Acronym for Portugal, Italy, Ireland, Greece, and Spain.

² Acronym for Capital, Assets, Management, Earnings, and Liquidity.

³ In this article, the response variable is solvency instead of banking risk or failure, so the expected signs will be the opposite.

⁴ The German bank Helaba because the EBA did not disclose its results, the Norwegian bank DnB NOR ASA since Norway is not a member of the European Union, and the four remaining banks due to lack of access to public accounting information in their corporate websites (the Greek ATEbank and the Spanish BFA-Bankia, Grupo BMN and Grupo Caja3).