Stress Testing and Bank Lending

77 Pages Posted: 8 Aug 2019 Last revised: 15 Dec 2022

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 can affect banks' lending behavior. Regulators must take banks' reactions into account: this can lead to soft stress tests in which a risky bank is passed in order to encourage lending, or to tough stress tests in which a safe bank is failed in order to reduce future risk taking. These short-term actions by the regulator can lead to long-term gains. However, information management can lead to inefficiencies when (i) banks react ex-ante to the anticipated stress test regime; (ii) the test loses credibility; or (iii) the test becomes self-fulfilling. When banks are more systemic, stress tests become tougher.

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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