Links
Next content
Read more
10 years of Banking Union case law – how did CJEU judgments shape supervision and resolution practice in the Banking Union?
At the request of the European Parliament’s Economic and Monetary Affairs Committee (ECON), the authors discusse how EU case law developed over the past decade relating to decisions taken by the European Central Bank...
Regularly conducted stress tests constitute a constraint on bank balance sheets: future equity must suffice to maintain current lending even after absorbing severe losses. Studying such a forward-looking constraint in a representative bank model, we show that a stricter stress test scenario leads to lower dividends, higher equity buffers, and lower, albeit less volatile, lending. Given this trade-off, the optimal scenario implies capital buffers of up to 6% when facing loan returns similar to those of large U.S. banks. Finally, we show that complementing stress tests with dividend restrictions improves lending stability, while relaxing counter-cyclical capital buffers does not.