Stress Testing and Bank Lending

62 Pages Posted: 8 Aug 2019 Last revised: 18 Jun 2020

See all articles by Joel D. Shapiro

Joel D. Shapiro

University of Oxford - Said Business School

Jing Zeng

University of Vienna - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2020

Abstract

Stress tests can affect banks' lending behavior. Since regulators care about lending, banks' reactions affect the test's design and create a feedback loop. We demonstrate that there may be multiple equilibria due to strategic complementarity, possibly leading to excess default or insufficient lending to the real economy. The stress tests may be too soft or too tough. Banking supervision exams have similar properties. When the recapitalization of banks becomes more difficult, stress tests are less informative. However, when a bank is more systemic, the stress test will be more informative.

Keywords: Bank regulation, stress tests, bank lending, feedback effect

JEL Classification: G21, G28

Suggested Citation

Shapiro, Joel D. and Zeng, Jing, Stress Testing and Bank Lending (June 18, 2020). Available at SSRN: https://ssrn.com/abstract=3432291 or http://dx.doi.org/10.2139/ssrn.3432291

Joel D. Shapiro

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Jing Zeng (Contact Author)

University of Vienna - Department of Finance

oskar-morgenstern-platz 1
Vienna, 1090
Austria

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