IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/13907.html
   My bibliography  Save this paper

Stress Testing and Bank Lending

Author

Listed:
  • Shapiro, Joel
  • Zeng, Jing

Abstract

Bank stress tests are a major form of regulatory oversight. Banks respond to the toughness of the tests by changing their lending behavior. Regulators care about bank lending; therefore, banks' reactions to the tests affect the tests' design and create a feedback loop. We demonstrate that stress tests may be (1) soft, in order to encourage lending in the future, or (2) tough, in order to deter excessive risk-taking in the future. There may be multiple equilibria due to strategic complementarity. Regulators may strategically delay stress tests. We also analyze bottom-up stress tests and banking supervision exams.

Suggested Citation

  • Shapiro, Joel & Zeng, Jing, 2019. "Stress Testing and Bank Lending," CEPR Discussion Papers 13907, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13907
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13907
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Morrison, Alan D. & White, Lucy, 2013. "Reputational contagion and optimal regulatory forbearance," Journal of Financial Economics, Elsevier, vol. 110(3), pages 642-658.
    2. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 57-95.
    3. Miguel Faria-e-Castro & Joseba Martinez & Thomas Philippon, 2017. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1683-1707.
    4. Thakor, Anjan V, 1996. " Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 51(1), pages 279-324, March.
    5. Skinner, Douglas J., 2008. "The rise of deferred tax assets in Japan: The role of deferred tax accounting in the Japanese banking crisis," Journal of Accounting and Economics, Elsevier, vol. 46(2-3), pages 218-239, December.
    6. Thomas H. Noe, 1988. "Capital Structure and Signaling Game Equilibria," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 331-355.
    7. repec:eee:jfinin:v:34:y:2018:i:c:p:58-90 is not listed on IDEAS
    8. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    9. Sumit Agarwal & David Lucca & Amit Seru & Francesco Trebbi, 2014. "Inconsistent Regulators: Evidence from Banking," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 889-938.
    10. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    11. Orlov, Dmitry & Zryumov, Pavel & Skrzypacz, Andrzej, 2017. "Design of Macro-prudential Stress Tests," Research Papers 3548, Stanford University, Graduate School of Business.
    12. Samuel G. Hanson & Anil K. Kashyap & Jeremy C. Stein, 2011. "A Macroprudential Approach to Financial Regulation," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 3-28, Winter.
    13. Paul S. Calem & Ricardo Correa & Seung Jung Lee, 2016. "Prudential Policies and Their Impact on Credit in the United States," International Finance Discussion Papers 1186, Board of Governors of the Federal Reserve System (U.S.).
    14. Matthieu Bouvard & Pierre Chaigneau & Adolfo De Motta, 2015. "Transparency in the Financial System: Rollover Risk and Crises," Journal of Finance, American Finance Association, vol. 70(4), pages 1805-1837, August.
    15. Schuermann, Til, 2014. "Stress testing banks," International Journal of Forecasting, Elsevier, vol. 30(3), pages 717-728.
    16. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743.
    17. repec:eee:jetheo:v:177:y:2018:i:c:p:34-69 is not listed on IDEAS
    18. Niepmann, Friederike & Stebunovs, Viktors, 2018. "Modeling Your Stress Away," CEPR Discussion Papers 12624, C.E.P.R. Discussion Papers.
    19. Joel Shapiro & David Skeie, 2015. "Information Management in Banking Crises," Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2322-2363.
    20. Morrison, Alan & White, Lucy, 2013. "Reputational Contagion and Optimal Regulatory Forbearance," CEPR Discussion Papers 9508, C.E.P.R. Discussion Papers.
    21. Flannery, Mark & Hirtle, Beverly & Kovner, Anna, 2017. "Evaluating the information in the federal reserve stress tests," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 1-18.
    22. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    23. Hoshi, Takeo & Kashyap, Anil K, 2010. "Will the U.S. bank recapitalization succeed? Eight lessons from Japan," Journal of Financial Economics, Elsevier, vol. 97(3), pages 398-417, September.
    24. Anjan V. Thakor, 2014. "Bank Capital and Financial Stability: An Economic Trade-Off or a Faustian Bargain?," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 185-223, December.
    25. Mark J. Garmaise & Tobias J. Moskowitz, 2006. "Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition," Journal of Finance, American Finance Association, vol. 61(2), pages 495-538, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bank lending; Bank Regulation; reputation; stress tests;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:13907. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.