Review of the 2017 SREP results

21-03-2018

This paper reviews the 2017 SREP results with a view to assessing their capital market implications and seeing whether the information provision about the SREP results could be improved. Aggregated SREP information as published by the ECB can be useful in detecting trends in banks’ conditions, but it cannot be meaningfully applied to assess capital market reactions to the SREP results. Bank-level SREP disclosures are voluntary, and therefore are expected to be biased towards news that is favourable to investors in securities. Consistent with this, we find that bank stock returns on average are positive on SREP disclosure days. Overall, the 2017 SREP information that is in the public domain is insufficient to evaluate the efficacy of the SREP as conducted by the ECB in terms of improving the regulatory and market discipline of banks. The publication of full bank-level SREP information (by either the ECB or the individual banks) would facilitate such an evaluation, but full disclosure is undesirable as it exposes the banks with the weakest supervisory reviews to potentially very severe market discipline. However, the ECB could improve the information provision about the SREP by requiring banks that choose to reveal any capital regulatory information to disclose a complete breakdown of their CET1 demand to improve data comparability across banks and hence potentially market discipline.

This paper reviews the 2017 SREP results with a view to assessing their capital market implications and seeing whether the information provision about the SREP results could be improved. Aggregated SREP information as published by the ECB can be useful in detecting trends in banks’ conditions, but it cannot be meaningfully applied to assess capital market reactions to the SREP results. Bank-level SREP disclosures are voluntary, and therefore are expected to be biased towards news that is favourable to investors in securities. Consistent with this, we find that bank stock returns on average are positive on SREP disclosure days. Overall, the 2017 SREP information that is in the public domain is insufficient to evaluate the efficacy of the SREP as conducted by the ECB in terms of improving the regulatory and market discipline of banks. The publication of full bank-level SREP information (by either the ECB or the individual banks) would facilitate such an evaluation, but full disclosure is undesirable as it exposes the banks with the weakest supervisory reviews to potentially very severe market discipline. However, the ECB could improve the information provision about the SREP by requiring banks that choose to reveal any capital regulatory information to disclose a complete breakdown of their CET1 demand to improve data comparability across banks and hence potentially market discipline.