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Stress testing and bank business patterns: A regression discontinuity study

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  • García, Raffi E.
  • Steele, Suzanne

Abstract

This paper examines whether forward-looking disclosure requirements impact firm business patterns. We rely on the implementation of the Comprehensive Capital Analysis Review (CCAR) stress test on U.S. bank holding companies as our identification strategy. Using a regression discontinuity design to exploit the quasi-experimental properties of the regulation around the different bank-size policy thresholds, we document four key findings. First, stress testing reduces moral hazard by decreasing the ratio of risk-weighted assets to total assets. Second, the decrease in moral hazard is not at the expense of bank lending since reducing risk results in higher concentrations in lending as banks shift out of higher-risk assets. Third, stress test banks’ lower risk is perceived by investors and results in lower funding costs relative to non-stress test banks. Fourth, the increase in regulatory oversight and stricter capital and transparency requirements do not cause large banks to manipulate their bank size to avoid complying with the stress test requirements.

Suggested Citation

  • García, Raffi E. & Steele, Suzanne, 2022. "Stress testing and bank business patterns: A regression discontinuity study," Journal of Banking & Finance, Elsevier, vol. 135(C).
  • Handle: RePEc:eee:jbfina:v:135:y:2022:i:c:s0378426620302260
    DOI: 10.1016/j.jbankfin.2020.105964
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    More about this item

    Keywords

    Banking; Stress tests; Regulation; Capital requirements; Credit supply; Regression discontinuity;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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