82 Pages Posted: 8 Nov 2017 Last revised: 4 May 2018
Date Written: April 17, 2018
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 encourage prudent investment from stressed banks through regulatory monitoring, but also provide them with steeper risk-taking incentives through tighter capital requirements. Our results highlight the importance of regulatory monitoring of banks' 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: Suggested Citation