The effects of the EBA's stress testing framework on banks' lending

Abstract

This paper investigates the impact of the European Banking Authority (EBA)'s supervisory stress tests on bank lending. Using a sample of 282 European banks over the period 2006–2018, we find that stress-tested banks experience higher credit risk and reduce lending for specific loan types. In particular, due to country heterogeneities, we find that the contraction in lending is more pronounced for stress-tested banks in the GIIPS region. Our results also suggest that the elevated credit risk of highly-exposed stress-tested banks can be a driving factor of a reduction in bank lending. Consequently, prudential measures requiring banks to hold higher capital buffers are justified to contain credit risk shocks.