Friederike Niepmann, Viktors Stebunovs, 30 July 2018

In the European Banking Authority’s EU-wide stress tests, banks project capital ratios under a hypothetical adverse scenario employing their own models, which are constrained by a common methodology set by the Authority. This column argues that letting banks produce their own projections means they are prone to manipulation. It finds evidence that banks' internal models are modified to lessen losses given the applicable scenarios and exposures. Without this manipulation, projected aggregate credit losses would have been up to 28% higher in the 2016 stress tests. 

Jorge Abad, Marco D'Errico, Neill Killeen, Vera Luz, Tuomas Peltonen, Richard Portes, Teresa Urbano, 25 April 2017

The Global Crisis highlighted how linkages between banks and shadow banking entities can lead to the amplification of shocks across borders and sectors, prompting policymakers to seek to improve the monitoring framework for assessing the interconnectedness of the shadow banking system. This column documents the cross-sector and cross-border exposures of EU banks to globally domiciled shadow banking entities. Among the findings are that 60% of these exposures are to shadow banking entities domiciled outside the EU and hence outside its supervisory powers,  and that approximately 65% of the exposures are to non-money market fund investment funds, finance companies, and securitisation entities. 

Pierluigi Bologna, Arianna Miglietta, Marianna Caccavaio, 14 October 2014

Following the financial crisis, European banks have taken steps to revise unsustainable business models by deleveraging. By this metric they have made substantial progress – but this column argues that improper management of the deleveraging process may threaten the recovery. The authors find that equity increases played a much larger role than asset decreases, and recommend increasing the disposal of bad assets.

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