By Christoffer Kok, Carola Müller, Steven Ongena and Cosimo Pancaro
Since the financial crisis, stress tests have become an important supervisory and financial stability tool. Relying on confidential data available at the ECB, this column presents novel evidence that supervisory scrutiny associated with stress testing has a disciplining effect on bank risk. Banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny, it also shows that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the stress test.