Stress Testing During Times of War

Columbia Law and Economics Working Paper No. 622

Handbook of Financial Stress Testing (J. Doyne Farmer, Alissa Kleinnijenhuis, Til Schuermann & Thom Wetzer, eds., Cambridge University Press) (forthcoming)

European Corporate Governance Institute - Law Working Paper No. 529/2020

33 Pages Posted: 24 Jun 2020

Date Written: June 23, 2020

Abstract

The Covid crisis raises important questions about the role of stress testing during periods of systemic distress. Should stress testing of banks be abandoned? Modified? Proceed as scheduled? Different jurisdictions have taken different tacks, reflecting contestation over these fundamental issues. This essay argues that stress tests become more important, not less, in the midst of systemic distress, but only if the stress scenarios are modified to reflect the distinct challenges an economy is facing. Well-designed stress tests can provide critical information to policy makers and others, promoting more timely efforts to address underlying weaknesses. Given that regulators will rationally be hesitant to produce, much less disclose, information that could exacerbate the very crisis regulators are seeking to contain, crisis-time stress testing is only viable if regulators also have the tools needed to address any bad news the testing may reveal.

Keywords: financial crisis, Covid-19, stress testing, bank supervision, Federal Reserve

JEL Classification: E32, E44, E58, E63, G28

Suggested Citation

Judge, Kathryn, Stress Testing During Times of War (June 23, 2020). Columbia Law and Economics Working Paper No. 622; European Corporate Governance Institute - Law Working Paper No. 529/2020. Available at SSRN: https://ssrn.com/abstract=3633310 or http://dx.doi.org/10.2139/ssrn.3633310

Kathryn Judge (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.law.columbia.edu/fac/Kathryn_Judge

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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