European Supervision And Stress Testing: Beware Of False Friends

First, I discuss whether the advent of a Single Supervisory Mechanism (SSM) in the Eurozone, which is generally considered as a major step forward for large European lenders, was well received by investors when it was announced. Second, I look back at past stress tests in Europe, which were often described as ineffective, to see whether such an assessment holds true in light of empirical evidence. Third, since bank supervision in Europe (including the SSM and the next round of stress test) is set to rely heavily on Risk-Weighted Assets (RWAs), I briefly investigate whether regulatory risk weights are as unreliable and disconnected from other risk measures as some authors have claimed.