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Stress Testing and Bank Lending

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  • Joel Shapiro
  • Jing Zeng

Abstract

Stress tests convey information about the strictness of future tests, creating incentives for banks to alter their future lending behavior. Regulators recognize and use this influence: they may conduct softer stress tests to encourage lending or tougher stress tests to reduce risk-taking. This information management can lead to inefficiencies when (a) the test loses credibility or (b) the test becomes self-fulfilling. In addition, banks may distort their lending behavior in anticipation of the stress test design, leading to further surplus losses. The analysis applies to banking supervision and regulation more broadly.

Suggested Citation

  • Joel Shapiro & Jing Zeng, 2024. "Stress Testing and Bank Lending," The Review of Financial Studies, Society for Financial Studies, vol. 37(4), pages 1265-1314.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:4:p:1265-1314.
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    Cited by:

    1. Maria Rosa Borges & José Zorro Mendes & André Pereira, 2019. "The Value of Information: The Impact of European Union Bank Stress Tests on Stock Markets," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(4), pages 429-444, November.
    2. D. Georgoutsos & G. Moratis, 2021. "On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(4), pages 977-1008, November.
    3. Ding, Haina & Guembel, Alexander & Ozanne, Alessio, 2020. "Market Information in Banking Supervision: The Role of Stress Test Design," TSE Working Papers 20-1144, Toulouse School of Economics (TSE).
    4. Yaron Leitner & Basil Williams, 2023. "Model Secrecy and Stress Tests," Journal of Finance, American Finance Association, vol. 78(2), pages 1055-1095, April.
    5. Sebastian Doerr, 2019. "Unintended side effects: stress tests, entrepreneurship, and innovation," BIS Working Papers 823, Bank for International Settlements.

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    More about this item

    Keywords

    G21; G28;

    JEL classification:

    • 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

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