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Bank Stress Testing: Public Interest or Regulatory Capture?

Author

Listed:
  • Thomas Schneider
  • Philip E Strahan
  • Jun Yang

Abstract

We test whether measures of influence on regulators affect stress-test outcomes. The large trading banks—those most plausibly Too Big to Fail—face the toughest tests. Supervisory stress tests have a greater effect on large trading banks’ portfolios; the large banks respond by making more conservative (initial) capital plans; and, despite their more conservative capital plans, the large banks still fail their tests more frequently than other banks. In contrast, while we find little evidence that political or regulatory connections affect the quantitative element of the stress tests, these connected banks do face less scrutiny under its qualitative dimension.

Suggested Citation

  • Thomas Schneider & Philip E Strahan & Jun Yang, 2023. "Bank Stress Testing: Public Interest or Regulatory Capture?," Review of Finance, European Finance Association, vol. 27(2), pages 423-467.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:2:p:423-467.
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    File URL: http://hdl.handle.net/10.1093/rof/rfac027
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    More about this item

    Keywords

    Stress testing; Bank regulation; Regulatory capture;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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