Bank Stress Testing: Public Interest or Regulatory Capture?*

Thomas Schneider, Philip E Strahan and Jun Yang

Review of Finance, 2023, vol. 27, issue 2, 423-467

Abstract: We test whether measures of influence on regulators affect stress-test outcomes. The large trading banks—those most plausibly Too Big to Fail—face the toughest tests. Supervisory stress tests have a greater effect on large trading banks’ portfolios; the large banks respond by making more conservative (initial) capital plans; and, despite their more conservative capital plans, the large banks still fail their tests more frequently than other banks. In contrast, while we find little evidence that political or regulatory connections affect the quantitative element of the stress tests, these connected banks do face less scrutiny under its qualitative dimension.

Keywords: Stress testing; Bank regulation; Regulatory capture (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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