The Impact of Regulatory Stress Tests on Bank Lending and its Macroeconomic Consequences

49 Pages Posted: 31 Dec 2020

See all articles by Falk Bräuning

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Jose L. Fillat

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: October 21, 2020

Abstract

We use an expansive regulatory loan-level data set to analyze how the portfolios of the largest US banks have changed in response to the Dodd-Frank Act Stress Test (DFAST) requirements. We find that the portfolios of the largest banks, which are subject to stress-testing, have become more similar to each other since DFAST was implemented in 2011. We also find that banks with poor stress-test results tend to adjust their portfolios in a way that makes them more similar to the portfolios of banks that performed well in the stress-testing. In general, stress-testing has resulted in more diversified bank portfolios in terms of sectoral and regional composition. However, we also find that all the large banks diversified in a similar way, creating a more concentrated systemic portfolio in the aggregate. Finally, we analyze the effects of stress-testing and portfolio sensitivity to macroeconomic scenarios on credit supply. Our findings indicate that banks that experience worse results in the stress tests cut lending relative to their peers and specifically in loans that are most sensitive to the stress-test scenarios. At the borrower level, firms that rely more on credit from banks with poor stress-test results are not able to substitute lost funding and therefore face a larger reduction in credit and cut back investment. These results highlight a macroprudential effect of stress-testing: Credit growth is curtailed during a credit expansion in those banks holding a portfolio that is more sensitive to stressful scenarios. Hence, these banks are expected to be in a more resilient position at the onset of a downturn.

Keywords: Stress Testing, Financial Stability, Credit Supply, Real Effects, Financial Regulation

JEL Classification: G20, G21, G28

Suggested Citation

Bräuning, Falk and Fillat, Jose L., The Impact of Regulatory Stress Tests on Bank Lending and its Macroeconomic Consequences (October 21, 2020). Available at SSRN: https://ssrn.com/abstract=3716448 or http://dx.doi.org/10.2139/ssrn.3716448

Falk Bräuning (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Jose L. Fillat

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3342 (Phone)
617-5735445 (Fax)

HOME PAGE: http://www.bos.frb.org/economic/econbios/fillat.htm

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