"Capital Shortfalls in SSM Banks: How much progress has been made?"
In-Depth Analysis provided at the request of the Economic and Monetary Affairs Committee, October 2015
On 26 October 2014, the European Central Bank (ECB) published the results of the comprehensive assessment that comprised both an asset quality review (AQR) as well as a stress test. Banks that have shown capital shortfalls after the assessment had up to 9 months the close the capital gap. In this paper, we investigate whether actions taken by banks have resulted in noticeable reactions in capital markets. Evidence suggests that banks with shortfalls made some progress during the months after the comprehensive assessment. However, banks that passed might actually be riskier than expected based on the official results from the ECB. Quantitative Easing (QE) by the ECB makes it difficult to interpret market prices due to inflation in asset prices and decrease in risk premia.