Stress Testing and Bank Lending
69 Pages Posted: 8 Aug 2019 Last revised: 27 Mar 2024
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Stress Testing and Bank Lending
Stress Testing and Bank Lending
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: Suggested Citation