Stress Testing and Bank Lending

64 Pages Posted: 8 Aug 2019

See all articles by Joel D. Shapiro

Joel D. Shapiro

University of Oxford - Said Business School

Jing Zeng

Frankfurt School of Finance and Management gGmbH

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2019

Abstract

Bank stress tests are a major form of regulatory oversight. Banks respond to the toughness of the tests by changing their lending behavior. Regulators care about bank lending; therefore, banks' reactions to the tests affect the tests' design and create a feedback loop. We demonstrate that stress tests may be (1) soft, in order to encourage lending in the future, or (2) tough, in order to deter excessive risk-taking in the future. There may be multiple equilibria due to strategic complementarity. Regulators may strategically delay stress tests. We also analyze bottom-up stress tests and banking supervision exams.

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 (August 5, 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)

Frankfurt School of Finance and Management gGmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.zengjing.net

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