Research: Evaluating the Resilience of European Bank Portfolios to Adverse Macro-Financ...

Research question: How do adverse macroeconomic scenarios impact the risk and capital adequacy of European bank portfolios as revealed through stress-testing methodologies?

Background & Motivation: The global financial system's stability depends significantly on the resilience of banking institutions to macroeconomic shocks. Regulatory stress tests have become critical tools for assessing banks' vulnerabilities to potential adverse scenarios, especially in light of recent economic crises and regulatory reforms in the European Union.

Research Gap: While there has been increasing research on stress-testing frameworks, there remains limited independent academic evaluation of how different macro-scenario shocks translate into bank portfolio vulnerabilities, particularly across diverse European contexts and asset classes. The interplay between scenario design, model assumptions, and real portfolio outcomes is not fully understood.

Approach & Expected Contribution: This project will apply advanced stress-testing methodologies, using publicly available data from the European Banking Authority (EBA) and macroeconomic indicators, to simulate the effects of multiple adverse scenarios on sample European bank portfolios. The study will compare model outputs with historical crisis periods and explore the sensitivity of results to scenario design, enhancing understanding of model risk and capital adequacy implications.

Why It Matters: By identifying strengths and weaknesses in current stress-testing practices, this research will contribute to the academic literature on financial stability and provide actionable insights for regulators, risk managers, and policymakers seeking to mitigate systemic risk in the banking sector.