Capital requirements and banks’ behavior: Evidence from bank stress tests

Mehrnoush Shahhosseini

The Quarterly Review of Economics and Finance, 2022, vol. 86, issue C, 240-262

Abstract: This paper examines the impact of higher regulatory capital on banks’ behavior using stress tests as a quasi-natural experiment. I employ an exogenous source of variation in bank capital requirements based on the U.S. Federal Reserve’s selection rule. I find that banks meet higher capital ratios through issuing equity that expands their assets and reduces debts. The capital requirements transmit to the real economy through the bank lending channel. Stress-tested banks increase lending while reducing credit supply to small and riskier borrowers. Dependent firms on borrowing from stress-tested banks reduce assets and investments extensively in response to the credit loss.

Keywords: Regulatory capital requirements; Bank stress tests; Financial crisis; A difference-in- differences model; Regression discontinuity (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S106297692200045X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:86:y:2022:i:c:p:240-262

DOI: 10.1016/j.qref.2022.04.001

Access Statistics for this article

The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty

More articles in The Quarterly Review of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().