Bank Stress Testing: Public Interest or Regulatory Capture?

49 Pages Posted: 30 Mar 2020 Last revised: 19 Jun 2023

See all articles by Thomas Schneider

Thomas Schneider

Old Dominion University - Finance

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Jun Yang

University of Notre Dame

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture.

Suggested Citation

Schneider, Thomas and Strahan, Philip E. and Yang, Jun, Bank Stress Testing: Public Interest or Regulatory Capture? (March 2020). NBER Working Paper No. w26887, Available at SSRN: https://ssrn.com/abstract=3563955

Thomas Schneider (Contact Author)

Old Dominion University - Finance ( email )

Norfolk, VA 23529-0222
United States

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jun Yang

University of Notre Dame ( email )

Notre Dame, IN
United States

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