Stressed Banks

84 Pages Posted: 8 Nov 2017 Last revised: 8 May 2019

See all articles by Diane Pierret

Diane Pierret

Universite du Luxembourg - Luxembourg School of Finance

Roberto Steri

University of Luxembourg

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

Pierret, Diane and Steri, Roberto, Stressed Banks (April 23, 2019). Swiss Finance Institute Research Paper No. 17-58, Available at SSRN: or

Diane Pierret (Contact Author)

Universite du Luxembourg - Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511

Roberto Steri

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi

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