Adding stress in banking: Stress tests and risk-taking sentiments

Raffi E. García, Jyothsna G. Harithsa and Abena Owusu

Journal of Corporate Finance, 2024, vol. 87, issue C

Abstract: We study the effects of transparency disclosures on U.S. banks’ relayed culture. Using bank stress-test regulations and a regression-discontinuity design, we exploit the quasi-experimental properties around bank-size policy thresholds. We find that stress-tested banks improve their communicated risk-taking culture and overall corporate culture by improving the sentiment around drivers of risk-taking culture, such as leadership. Stress testing, however, has the unintended consequence of negatively affecting sentiment regarding teamwork and innovation. We find that only banks with strong risk-taking-culture sentiments further reduce their risk-weighted assets and risky loans while increasing profitability, highlighting the distinctive role of the risk subculture in banking.

Keywords: Bank stress test; Corporate risk culture; Corporate culture; Transparency disclosure; Regression discontinuity (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 G30 M14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:87:y:2024:i:c:s0929119924000580

DOI: 10.1016/j.jcorpfin.2024.102596

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