Did the Banking Union Reduce Stress Test Information Production? the Role of Negative Financial Stability Spillovers

We examine the impact of the EU Banking Union on the information production of stress tests by exploiting the institutional shift in supervisory responsibility for significant banks to the European Central Bank (ECB) under the Single Supervisory Mechanism (SSM). We hypothesize that a centralized authority with both supervisory and financial stability mandates may reduce the informativeness of stress tests to mitigate negative spillovers, particularly potential threats to financial stability arising from disclosure. Our findings support this hypothesis, showing that the information production from stress tests declined following the introduction of the SSM. This reduction is primarily driven by weakly performing banks. We find no support for alternative explanations such as supervisory leniency, market learning, or the absence of an acute crisis.