XXV Edition

1-2 December 2016"

Do Capital Adequacy and Credit Quality Affects Systematic Risk? An Investigation on a Sample of European Listed Banks at Light of Eba Stress Tests

Floreani Josanco, University of Udine
Miani Stefano, University of Udine
Paltrinieri Andrea, University of Udine

Based on a sample of 60 European listed banks, which were subjected to stress test ex-ercises bay the European Banking Authority over the last years, we investigate the driv-ers of systematic risk measured by the market beta taking into account bank specific variables. Central in our analysis are credit-quality variables, accounting policies and, specifically, provisioning policies along with supervisory capital rations. In that we joint assess the effect of current figures and projected variables measuring bank’s vulnerabil-ity to stressed scenarios. We complement the analysis by investigating the impact of credit quality and capital adequacy variables on the systematic risk associated to growth opportunities. Our results suggest that higher capitalization coupled with prudent provisioning policies contributes to reduce systematic risk exposure. We find that systematic risk is responsive to stressed measures of bank’s vulnerability. In that, stress test results act as an anchor to market expectations. Finally, we account for a significant impact of Tier 1 capital ratios on betas of growth opportunities.

Area: Banking

Keywords: capital adequacy; credit quality; systematic risk

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