Stressed banks? Evidence from the largest-ever supervisory review
File(s)
Accepted version
Author(s)
Abbassi, Puriya
Iyer, Rajkamal
Peydro, Jose Luis
Soto, Paul
Type
Journal Article
Abstract
We study short-term and medium-term changes in bank risk-taking as a result of supervision, and the
associated real effects. For identification, we exploit the European Central Bank’s asset-qualityreview (AQR) in conjunction with security and credit registers. After the AQR announcement,
reviewed banks reduce riskier securities and credit supply, with the greatest effect on riskiest
securities. We find negative spillovers on asset prices and firm-level credit availability. Moreover,
non-banks with higher exposure to reviewed banks acquire the shed risk. After the AQR compliance,
reviewed banks reload riskier securities but not riskier credit, resulting in negative medium-term
firm-level real effects. These effects are especially strong for firms with high ex-ante credit risk.
Among these non-safe firms, even those with high ex-ante productivity experience negative real
effects. Our findings suggest that banks’ liquid assets help them to mask risk from supervisors and
risk adjustments banks make in response to supervision have persistent corporate real effects.
associated real effects. For identification, we exploit the European Central Bank’s asset-qualityreview (AQR) in conjunction with security and credit registers. After the AQR announcement,
reviewed banks reduce riskier securities and credit supply, with the greatest effect on riskiest
securities. We find negative spillovers on asset prices and firm-level credit availability. Moreover,
non-banks with higher exposure to reviewed banks acquire the shed risk. After the AQR compliance,
reviewed banks reload riskier securities but not riskier credit, resulting in negative medium-term
firm-level real effects. These effects are especially strong for firms with high ex-ante credit risk.
Among these non-safe firms, even those with high ex-ante productivity experience negative real
effects. Our findings suggest that banks’ liquid assets help them to mask risk from supervisors and
risk adjustments banks make in response to supervision have persistent corporate real effects.
Date Acceptance
2023-06-09
Citation
Management Science
ISSN
0025-1909
Publisher
Institute for Operations Research and Management Sciences
Journal / Book Title
Management Science
Copyright Statement
Copyright This paper is embargoed until publication.
Publication Status
Accepted
Rights Embargo Date
10000-01-01