The Impact of Post Stress Tests Capital on Bank Lending

50 Pages Posted: 26 Dec 2018 Last revised: 21 Feb 2019

See all articles by William F. Bassett

William F. Bassett

Board of Governors of the Federal Reserve System

Jose M. Berrospide

Board of Governors of the Federal Reserve System

Date Written: 2018-12-21

Abstract

We investigate one channel through which the annual bank stress tests, as part of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) review, could unexpectedly affect the provision of bank credit. To quantify the impact of the stress tests on lending, we compare the capital implied by the supervisory stress tests with the level of capital implied by the banks’ own models, a measure we call the capital gap. We then study the impact of the capital gap on the loan growth of BHCs subject to supervisory or bank-run stress tests. Consistent with previous results in the bank capital literature, we find evidence that better capitalized banks have higher loan growth. The additional capital implied by the supervisory stress tests (capital gap) does not appear to unduly restrict loan growth.

Keywords: Bank capital, Bank lending, Regulatory capital, Stress tests

JEL Classification: G28, G21

Suggested Citation

Bassett, William F. and Berrospide, Jose M., The Impact of Post Stress Tests Capital on Bank Lending (2018-12-21). FEDS Working Paper No. 2018-087. Available at SSRN: https://ssrn.com/abstract=3306150 or http://dx.doi.org/10.17016/FEDS.2018.087

William F. Bassett (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jose M. Berrospide

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-3590 (Phone)

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