Stressed Banks

81 Pages Posted: 8 Nov 2017 Last revised: 16 Oct 2018

See all articles by Diane Pierret

Diane Pierret

HEC - University of Lausanne; Swiss Finance Institute

Roberto Steri

University of Lausanne; Swiss Finance Institute

Date Written: April 17, 2018

Abstract

We investigate the risk taking incentives of ”stressed banks” — the banks that are subject to annual regulatory stress tests in the U.S. since 2011. We document that stress tests effectively prevent excessive risk taking by bringing additional scrutiny on the investment portfolios of stressed banks. Higher capital requirements are not a substitute for regulatory scrutiny to promote prudent lending. However, the correction in regulatory capital charges originating from stress tests effectively reduces risky lending. Overall, our results highlight the importance of regulatory scrutiny of bank portfolios in parallel to setting more stringent capital requirements.

Keywords: Capital Regulation, Dodd-Frank Act, Regulatory Monitoring, Stress Tests

JEL Classification: G01, G21, G28

Suggested Citation

Pierret, Diane and Steri, Roberto, Stressed Banks (April 17, 2018). Swiss Finance Institute Research Paper No. 17-58. Available at SSRN: https://ssrn.com/abstract=3066403 or http://dx.doi.org/10.2139/ssrn.3066403

Diane Pierret (Contact Author)

HEC - University of Lausanne ( email )

Institute of Banking and Finance
Unil Dorigny, Batiment Extranef
Lausanne, 1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Roberto Steri

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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