Stress Testing and Bank Lending

69 Pages Posted: 8 Aug 2019 Last revised: 27 Mar 2024

See all articles by Joel D. Shapiro

Joel D. Shapiro

University of Oxford - Said Business School

Jing Zeng

University of Bonn; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2019

Abstract

Stress tests convey information about the strictness of future tests, creating incentives for banks to alter their future lending behavior. Regulators recognize and use this influence: they may conduct softer stress tests to encourage lending or tougher stress tests to reduce risk-taking. This information management can lead to inefficiencies when (a) the test loses credibility or (b) the test becomes self-fulfilling. In addition, banks may distort their lending behavior in anticipation of the stress test design, leading to further surplus losses. The analysis applies to banking supervision and regulation more broadly.

Keywords: Bank regulation, stress tests, bank lending, reputation

JEL Classification: G21, G28

Suggested Citation

Shapiro, Joel D. and Zeng, Jing, Stress Testing and Bank Lending (June 18, 2019). 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 Bonn ( email )

Adenauerallee 24-26
Bonn, D-53012
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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