We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks' estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks' losses and compare them to actual...

We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks' estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks' losses and compare them to actual...

We re-examine the probabilistic foundation of the link between Z-score measures and banks' probability of insolvency, offering an improved measure of that probability without imposing further distributional assumptions. While the traditional measure of the probability of insolvency thus provides...

We highlight caveats arising in the application of traditional ROA-based Z-scores for the measurement of bank insolvency risk, develop alternative Z-score measures to resolve these issues, and make recommendations for best practice for the US/Europe based on the experience of the financial...