Determinants of the spread of CET1 for European Banks : Quantitative study based on the 2016 EU-wide Stress test

Abstract: Historically, banks have always had a central role in the economy. Their decisions do not only affect their shareholders and customers but the whole economic system. As a consequence, the financial crisis of 2007-2008 has shown that bank management is a huge matter and that the failure of one bank can affect tremendously the whole banking system and the economy. For these reasons, banks need to be regulated by external organisations that constrain them to adjust their regulatory capital via their risk weighted assets. This paper examines the significant factors of the spread between the scenarios on Common Equity Tier 1 (CET1) of the 2016 stress test for EU banks. CET1 is a component of capital adequacy ratio and measures the connections between capital euntens’ris-weighted assets. On a methodological standpoint, this research is based on a positivist approach this meaning that a quantitative analysis has been performed. The sample used in this research is composed of 51 banks from 15 countries across EU and European Economic Area. All of these banks have been analysed by the European Banking Authority (EBA) which has conducted stress test in order to assess CET1 as regards to Basel III framework. The researchers have elaborated a conceptual model in order to select the most relevant variables that might affect the spread of CET1. The hypotheses are based on previous researches and take into account the following independent variables: Size, Stock Exchange Listed, Leverage ratio, Loans on Assets, Net Interest Margin, Risk-Weighted Assets to Total Assets and Profitability. Simple linear regression and multiple linear regressions have been performed to test the impact of all the independent variables on the spread of CET1. The statistical analyses have revealed that there are no significant relationships between the selected variables, except for size that has a significant negative impact on the spread as part of the multiple regression. Therefore, none of the hypotheses can be supported. These results provide new insights in the banking sector and to a larger extent for finance. They may be considered as a basis for future research on the spread of CET1.