The Information Value of the Stress Test and Bank Opacity

37 Pages Posted: 29 Jul 2010

See all articles by Stavros Peristiani

Stavros Peristiani

Federal Reserve Bank of New York--Retired

Donald P. Morgan

Federal Reserve Bank of New York

Vanessa Savino

Federal Reserve Bank of New York

Date Written: July 1, 2010

Abstract

We investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the stress test helped quell the financial panic by producing vital information about banks. Our findings also contribute to the academic literature on bank opacity and the value of government monitoring of banks.

Keywords: Supervisory Capital Assessment Program, Capital Gap, Event Study

JEL Classification: G01, G21

Suggested Citation

Peristiani, Stavros and Morgan, Donald P. and Savino, Vanessa, The Information Value of the Stress Test and Bank Opacity (July 1, 2010). FRB of New York Staff Report No. 460. Available at SSRN: https://ssrn.com/abstract=1650670 or http://dx.doi.org/10.2139/ssrn.1650670

Stavros Peristiani (Contact Author)

Federal Reserve Bank of New York--Retired ( email )

3001 Henry Hudson Pkwy W
Apartment 1C
Bronx, NY New York 10463
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Donald P. Morgan

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Vanessa Savino

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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