Do Stress Tests Affect Bank Liquidity Creation?

58 Pages Posted: 20 Apr 2020

See all articles by Thach Vu Hong Nguyen

Thach Vu Hong Nguyen

Nottingham University Business School

Shamim Ahmed

University of Liverpool Management School

Thanaset Chevapatrakul

Nottingham University Business School

Enrico Onali

University of Exeter Business School

Date Written: March 26, 2020

Abstract

We examine the impact of Federal Reserve stress tests from 2009 to 2016 on U.S. bank liquidity creation. Empirical results show that regulatory stress tests have a negative effect on both on- and off-balance sheet bank liquidity creation and asset-side liquidity creation. As banks enter the stress tests, they reduce their liquidity creation to avoid failing the stress tests. These results are consistent with the hypothesis that banks manage their risk exposures to meet higher capital requirements. The negative effect of stress testing on liquidity creation continues to persist in the quarters after the stress tests. Finally, stress test banks appear to increase liability-side liquidity creation. These findings highlight that the enhanced financial stability from greater regulatory scrutiny may be achieved at the expense of financial intermediation.

Keywords: Stress testing, Bank liquidity creation, SCAP, CCAR

JEL Classification: G21, G28

Suggested Citation

Nguyen, Thach and Ahmed, Shamim and Chevapatrakul, Thanaset and Onali, Enrico, Do Stress Tests Affect Bank Liquidity Creation? (March 26, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3561437

Thach Nguyen (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Nottingham, NG8 1BB
United Kingdom

Shamim Ahmed

University of Liverpool Management School ( email )

Thanaset Chevapatrakul

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Enrico Onali

University of Exeter Business School ( email )

Exeter
United Kingdom

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