Stress Testing and Bank Lending

Joel Shapiro and Jing Zeng

The Review of Financial Studies, 2024, vol. 37, issue 4, 1265-1314

Abstract: Stress tests convey information about the strictness of future tests, creating incentives for banks to alter their future lending behavior. Regulators recognize and use this influence: they may conduct softer stress tests to encourage lending or tougher stress tests to reduce risk-taking. This information management can lead to inefficiencies when (a) the test loses credibility or (b) the test becomes self-fulfilling. In addition, banks may distort their lending behavior in anticipation of the stress test design, leading to further surplus losses. The analysis applies to banking supervision and regulation more broadly.

Keywords: G21; G28 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Stress Testing and Bank Lending (2019)
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