Diversification, bank risk, bank return, non-interest income, G21,

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Analysing the database made available by the European Central Bank and by the European Banking Authority, we evaluate the Comprehensive Assessment (Asset Quality Review and Stress Test) of banks carried out in 2014. In a nutshell, the main results are: i) risk-adjusted capital ratios are negatively related to the Asset Quality Review shortfall, but not to the Stress Test shortfall, whereas the leverage ratio plays a significant role in both cases; ii) the Comprehensive Assessment predominantly concentrated on traditional credit activity rather than on banks' financial assets; iii) the Comprehensive Assessment seems to be characterized by double standards. The Asset Quality Review was severe with banks operating in non-core countries, while medium-sized banks were either riskier or were treated severely in both exercises. The analysis leads to a puzzle: comparatively, the assessment per se led to significant adjustments for solid banks and large shortfalls for weak banks. The puzzle can be resolved by referring to the legacy of the country's former supervisory activity and to the low level of capitalization of weak banks mostly in peripheral countries.

The financial crisis renewed the debate on the bailout of financial institutions, questioning the effectiveness of such an intervention in restoring normal economic conditions. This paper analyzes the effect of State aids to distressed banks on the real economy, using a panel approach that covers all countries in the EU throughout the financial crisis. Results show that State aids were able to enhance economic conditions by restoring trust in financial markets. State aids boosted the ongoing substitution between securities and bank lending as the main financing channel of non-financial firms.