During the recent sovereign debt crisis, the European Banking Authority
conducted two stress tests on European banks in order to gauge their
capital needs, core Tier-1 ratios and ratios of resilience to adverse shocks.
We assess the informational content of the disclosure of the stress test
outcomes. We conclude that the stress tests conveyed new information
and that the outcomes were not anticipated by the stock market but were
partially anticipated by the CDS market. However, while the stock market
reacted to the disclosure of the stress test outcomes, in the CDS market
there is some evidence of a ‘reverse’ reaction. Moreover, the publication
of the outcomes of the stress tests had a stronger impact in the stock
prices of riskier financial institutions. A similar pattern is evident in the CDS
market, albeit narrowed to one of the stress tests and amid the financial
institutions with higher perceived credit risk.
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