Dao, Trang H.Pugliese, AmedeoRonen, Joshua2023-07-262023-07-262022Dao TH, Pugliese A, Ronen J. Assessing banks’ resilience: a complementary approach to stress testing using fair values from banks’ financial statements. J Bus Finance Account. 2022;50(7-8):1206-39. p. DOI: 10.1111/jbfa.126630306-686Xhttp://hdl.handle.net/10230/57675For more than a decade, supervisory banking authorities in Europe and the United States have sought to assess the resilience of banks to adverse economic episodes to safeguard the financial system's stability. They rely on regulatory capital measures like Common Equity Tier 1 (CET1) relative to risk-weighted assets in the aftermath of potential economic crises. We propose a new measure of banks' resilience based on financial statements. The fair value margin (FVM) is estimated as the difference between the fair value of assets and the book value of liabilities, scaled by the book value of equity. We find that FVM is positively associated with the surplus or shortfall of CET1 resulting from the stress testing results from 2014, 2016 and 2018. To corroborate the relevance of FVM for supervisory authorities, we compare the ability of the loan component of FVM to predict future credit losses with the capital surplus/shortfall metric derived from the stress test. The findings indicate that the fair value of loans predicts net charge-offs better than stress test outcomes. Therefore, we suggest that FVM could be used as a readily available and relatively low-cost tool to assess bank resilience, thus complementing the stress test exercises.application/pdfeng© 2022 The Authors. Journal of Business Finance & Accounting published by John Wiley & Sons Ltd. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.info:eu-repo/semantics/articlehttp://dx.doi.org/10.1111/jbfa.12663banking regulationfair valuefinancial reportingfinancial stabilitystress testinginfo:eu-repo/semantics/openAccess