An examination of bank behavior around Federal Reserve stress tests

Marcia Millon Cornett, Kristina Minnick, Patrick J. Schorno and Hassan Tehranian

Journal of Financial Intermediation, 2020, vol. 41, issue C

Abstract: Examining bank behavior around Federal Reserve stress tests, we find that stress test banks increase capital ratios at the starting point for annual stress testing significantly more than non-stress test banks. These trends are completely reversed (and economically significant) in the other quarters. Further, the differences between stress test and non-stress test banks seen in stress test years do not occur in 2010, when the Fed did not conduct a stress test. Results show that, as they enter the stress test, stress test banks lower dividends significantly more than non-stress test banks. Finally, stress test banks spend significantly more on lobbying than non-stress test banks. The results suggest that stress test banks may be managing financial performance and investing in political spending to improve their chances of passing stress tests.

Keywords: Financial institutions; Stress testing; Federal Reserve; Political lobbying (search for similar items in EconPapers)
JEL-codes: D72 E58 G21 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:41:y:2020:i:c:s1042957318300330

DOI: 10.1016/j.jfi.2018.05.001

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