Macro-stress testing dividend income. Evidence from euro area banks

Abstract

This paper employs panel data methods to estimate a macro-financial model for dividend income for a sample of euro area banks, with results indicating that financial and macroeconomic variables help explain dividend income. Using the estimated parameters, the study conducts a scenario analysis projecting dividend income over a three-year horizon conditional on the baseline and adverse macroeconomic scenarios prepared for the 2020 EU-wide stress test. The resulting projections show that dividend income is markedly more conservative under the adverse scenario compared to the baseline scenario. This implies that it is important to take account of financial and macroeconomic variables when stress testing dividend income of banks. Relying on scenario-independent dividend income projections might lead to a misrepresentation of banking-sector soundness and resilience to shocks.