Predictability of US and European Bank Stress Test Results

Regulatory stress tests have become a key tool for enhancing the safety and soundness of the banking system. However, recent debates on the importance and reliability of the stress tests have shown the need for the redesign of its methodologies. This paper examines the informativeness of the stress tests trough nine years in the United States and the European Union. Using standard event study techniques a sample of companies, participating in stress test analysis between May, 2009 and November, 2018, was assessed for the significance of the changes in the abnormal returns. Further, this paper focuses on the comparison of the reactions of the United States and the European Union markets. The main empirical results suggest that the impact of the disclosure event on the financial markets varies with years. Nevertheless, the disclosures of the EU wide stress test analysis and U.S. stress tests results are both very informative to the financial markets, but different in market sentiments.