Based on a sample of 59 European listed banks, we employ an event study analysis to
investigate the impact of the European Banking Authority (EBA) stress tests on
systematic risk measured by market betas. We further investigate the drivers of
systematic risk taking into account bank-specific variables, which include credit
quality, accounting policies, bank loan loss provisions (LLPs) and capital ratios,
along with supervisory assessments of bank vulnerability to stressed scenarios. Finally,
we assess the impact of credit quality and capital adequacy variables on the
systematic risk associated with growth opportunities.
Our results suggest that stress tests act as a credible anchor to market expectations
leading betas to decline. The effect is more pronounced for banks involved
in multiple stress tests over time. Our second finding shows a signifcant and positive impact of Tier 1 capital ratios on betas, i.e., higher capitalization levels
contribute to reducing the exposure to systematic risk. Moreover, market betas are
responsive to bank vulnerability to stress scenario, in particular, regarding asset
riskiness. Finally, betas of growth opportunities are affected by provisioning policies
in the sense that conservative provisioning policies impair the ability to invest
in growing assets.
