Bank Stress Testing: Public Interest or Regulatory Capture?
Review of Finance, 2022;, rfac036, https://doi.org/10.1093/rof/rfac036
48 Pages Posted: 9 Apr 2020 Last revised: 11 Oct 2022
There are 2 versions of this paper
Bank Stress Testing: Public Interest or Regulatory Capture?
Bank Stress Testing: Public Interest or Regulatory Capture?
Date Written: March 20, 2020
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.
Keywords: Stress Testing, Bank Regulation, Regulatory Capture
JEL Classification: G21, G28, G35
Suggested Citation: Suggested Citation