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Are stress tests beauty contests? (and what we can do about it)
Journal of Risk Management in Financial Institutions,
13
(2),
126-134
(2020)
Abstract
There is increasing debate on whether official-sector stress tests are fit for purpose and deliver what they are designed for. In the European Union, this discussion focuses not only on the costs and benefits of such a large-scale bottom-up exercise and on the possible options to improve its usefulness for banks, supervisors and the general public, but also on exploring ways to make it less burdensome. This paper discusses whether some improvements to the design of the EU-wide stress test could better align the incentives of the different stakeholders involved. In particular, the objective is to understand whether there is room for mitigating the beauty contest problem, namely the problem that banks are more interested in showing that they are outperforming others than in identifying actual risks in an adverse scenario.
Keywords: stress test; bank; European Banking Authority; supervision; beauty contest; incentives
The full article is available to subscribers to the journal.
Author's Biography
Mario Quagliariello is the Director of the Economic Analysis and Statistics Department at the European Banking Authority (EBA). The department is in charge of statistics, impact assessment, and the analysis of risks and vulnerabilities in the EU banking sector as well as stress testing. Before joining the EBA in 2011, Mario worked for 12 years at Banca d’Italia, the Italian central bank. Mario has published several papers on banking and financial regulation and edited the volume Stress Testing the Banking System: Methodologies and Applications, published by Cambridge University Press. For Riskbooks, he coedited the volume Basel III and Beyond: A Guide to Banking Regulation after the Crisis and edited Europe’s New Supervisory Toolkit: Data, Benchmarking and Stress Testing for Banks and Their Regulators. He holds a bachelor’s degree in economics with honours from University ‘La Sapienza’ in Rome and a PhD in economics from the University of York (United Kingdom).
Citation
Quagliariello, Mario (2020, March 1). Are stress tests beauty contests? (and what we can do about it). In the Journal of Risk Management in Financial Institutions, Volume 13, Issue 2. https://doi.org/10.69554/NGND8670.
© Henry Stewart
Publications LLP
Publications LLP