How informative are bank stress tests? - Bank opacity in the European Union

This paper uses standard event study techniques to examine whether the release of the results of the 2010 European bank stress test was informative to the financial markets by reducing the opacity that is inherent in banking stocks. The same methodology is applied to two events of the 2011 EU stress tests: the release of the methodology employed and the clarification by the European Banking Authority concerning capital requirements. For all events, four groups are examined: the stress-tested banks, the next 50 largest banks, and a geographical division into PIIGS banks and non-PIIGS banks. The empirical results indicate that the 2010 results event and the 2011 clarification event were relatively uninformative to the financial markets. However, the 2011 methodology event was found to be highly informative for all groups. These findings indicate that banks are opaque to an intermediate degree. The separation of stress-tested banks into regional portfolios unfortunately yielded no new insights into the issue of bank opacity