Banking solvency determinants in the EU: a model based on stress tests

Using a multilevel regression model, this article aims to find determinants of banking solvency in the European Union. The endogenous variable is defined as the capital ratio determined by stress tests. Both internal (financial ratios and sovereign debt exposures) and external (macroeconomic indicators) variables are proposed as covariates. The results reveal that capitalization, earnings, assets structure and exposure to PIIGS (Portugal, Italy, Ireland, Greece and Spain) sovereign debt are significant among the former, and economic growth, interest and exchange rates, and real estate prices among the latter.