The information value of the stress test and bank opacity
AbstractWe investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced the information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the stress test helped quell the financial panic by producing vital information about banks. Our findings also contribute to the academic literature on bank opacity and the value of government monitoring of banks.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 460.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-07-31 (Accounting & Auditing)
- NEP-ALL-2010-07-31 (All new papers)
- NEP-BAN-2010-07-31 (Banking)
- NEP-BEC-2010-07-31 (Business Economics)
- NEP-CBA-2010-07-31 (Central Banking)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Beverly J. Hirtle & Jose A. Lopez, 1999. "Supervisory information and the frequency of bank examinations," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 1-20.
- repec:fip:fedcwp:13-12 is not listed on IDEAS
- Petrella, Giovanni & Resti, Andrea, 2013. "Supervisors as information producers: Do stress tests reduce bank opaqueness?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5406-5420.
- Flannery, Mark J. & Kwan, Simon H. & Nimalendran, Mahendrarajah, 2013. "The 2007–2009 financial crisis and bank opaqueness," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 55-84.
- Ekaterina Neretina & Cenkhan Sahin & Jakob de Haan, 2014. "Banking stress test effects on returns and risks," DNB Working Papers 419, Netherlands Central Bank, Research Department.
- Mark Flood & Jonathan Katz & Stephen J Ong & Adam Smith, 2013. "Cryptography and the economics of supervisory information: balancing transparency and confidentiality," Working Paper 1312, Federal Reserve Bank of Cleveland.
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