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The Impact of Regulatory Stress Tests on Banks' Portfolio Similarity and Implications for Systemic Risk

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  • FALK BRÄUNING
  • JOSÉ L. FILLAT

Abstract

Portfolio similarity among the largest U.S. banks has increased since stress testing began in 2012. Using aggregate and detailed loan‐level data, we find that, as a result of stress testing, banks rebalance their portfolio toward similarly diversified portfolios, leading to higher concentration in the aggregate banking system and raising financial stability concerns as systemic risk contributions increase. The rebalancing is driven by a supply contraction in loans that cause larger losses under stress testing, especially by banks with high capital losses in past stress tests. This rebalancing holds conditional on assets that have identical contributions to regulatory capital requirements.

Suggested Citation

  • Falk Bräuning & José L. Fillat, 2025. "The Impact of Regulatory Stress Tests on Banks' Portfolio Similarity and Implications for Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(6), pages 1387-1419, September.
    • Handle: RePEc:wly:jmoncb:v:57:y:2025:i:6:p:1387-1419
    DOI: 10.1111/jmcb.13239
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    References listed on IDEAS

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    1. Cuzzola, Angelo & Barbieri, Claudio & Hałaj, Grzegorz, 2025. "Gaming the test? Window-dressing and portfolio similarity around the EU-wide stress tests," Working Paper Series 3094, European Central Bank.

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