Macro stress testing euro area banks’ fees and commissions

• Published in: Journal of international financial markets, institutions & money Vol. 61; pp. 97 - 119
• Main Authors: Kok, Christoffer, Mirza, Harun, Pancaro, Cosimo
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-07-2019
• Subjects: Fee and commission income; Scenario analysis; Stress testing; Stress testing; Scenario analysis; G01; G17; Fee and commission income; G21
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2019.02.005

•A macro-financial model to analyse bank fee and commission income is proposed.•Fee and commission income depends on interest rates, stock market returns and GDP.•The parameters are used for a stress test scenario exercise.•Fee and commission income projections under stress are more conservative.
This paper uses panel econometric techniques to estimate a macro-financial model for fee and commission income over total assets for a broad sample of euro area banks. Using the estimated parameters, it conducts a scenario analysis projecting the fee and commission income ratio over a three-year horizon conditional on the baseline and adverse macroeconomic scenarios used in the 2016 EU-wide stress test. The results indicate that the fee and commission income ratio is varying in particular with changes in its own lag, the short-term interest rate, stock market returns and real GDP growth. They also show that the fee and commission income ratio projections are more conservative under the adverse scenario than under the baseline scenario. These findings suggest that stress tests assuming scenario-independent fee and commission income projections are likely to be flawed.