84 Pages Posted: 8 Nov 2017 Last revised: 8 May 2019
Date Written: April 23, 2019
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 risk management and capital planning processes of stressed banks. Higher capital requirements (regulation) are not a substitute for scrutiny (supervision) 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 enhanced supervision of banks in parallel to setting more stringent capital requirements.
Keywords: Capital Regulation, Dodd-Frank Act, Stress Tests, Supervision
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation