Stress-Testing Net Trading Income: The Case of European Banks

Net trading income is an important but volatile source of for many euro area banks, highly sensitive to changes in financial market conditions. Using a representative sample European we study the distribution net (normalized by total assets) conditional key macro-financial risk factors. To map linkages with factors and capture non-linear effects, implement dynamic fixed effects quantile model using method moments approach. We use empirically estimate forecast from which quantify tail measures expected losses across banks. find heterogeneous asymmetric impact on income. Credit interest rate spreads affect lower quantiles while stock returns are determinant upper quantiles. also that onset Covid-19 pandemic resulted significant increase 5th 10th percentile capital shortfall. Moreover, adverse scenario forecasts show wide dispersion long-left evident especially most severe scenarios. Our findings highlight strong inter-linkages between suggest this tractable methodology ideal as additional tool stress test exercises.