Bank Stress Testing: Public Interest or Regulatory Capture?

Thomas Ian Schneider, Philip E. Strahan and Jun Yang

No 26887, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban and nep-cba
Note: CF
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Citations: View citations in EconPapers (2)

Published as Thomas Schneider & Philip E Strahan & Jun Yang, 2023. "Bank Stress Testing: Public Interest or Regulatory Capture?," Review of Finance, vol 27(2), pages 423-467.

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