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The information value of the stress test and bank opacity

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  • Donald P. Morgan
  • Stavros Peristiani
  • Vanessa Savino

Abstract

We 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.

Suggested Citation

  • Donald P. Morgan & Stavros Peristiani & Vanessa Savino, 2010. "The information value of the stress test and bank opacity," Staff Reports 460, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:460
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    References listed on IDEAS

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    1. Beverly 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.
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    Cited by:

    1. repec:wsi:gcrxxx:v:05:y:2015:i:01:n:s2010493615500075 is not listed on IDEAS
    2. Burkhard Heer & Alfred Maußner, 2013. "Asset Returns, the Business Cycle and the Labor Market," German Economic Review, Verein für Socialpolitik, vol. 14(3), pages 372-397, August.
    3. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, Mahendrarajah, 2013. "The 2007–2009 financial crisis and bank opaqueness," Journal of Financial Intermediation, Elsevier, pages 55-84.
    4. repec:fip:fedcwp:13-12 is not listed on IDEAS
    5. Joel Shapiro & David Skeie, 2015. "Information Management in Banking Crises," Review of Financial Studies, Society for Financial Studies, pages 2322-2363.
    6. Mark D. 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.
    7. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series WP-2014-4, Federal Reserve Bank of Chicago.
    8. Giovanni Cespa & Xavier Vives, 2011. "Expectations, Liquidity, and Short-term Trading," CESifo Working Paper Series 3390, CESifo Group Munich.
    9. Covas, Francisco B. & Rump, Ben & Zakrajšek, Egon, 2014. "Stress-testing US bank holding companies: A dynamic panel quantile regression approach," International Journal of Forecasting, Elsevier, pages 691-713.
    10. Gary Gorton, 2015. "Stress for Success: A Review of Timothy Geithner's Financial Crisis Memoir," Journal of Economic Literature, American Economic Association, pages 975-995.
    11. Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, pages 1-11.
    12. Quijano, Margot, 2014. "Information asymmetry in US banks and the 2009 bank stress test," Economics Letters, Elsevier, pages 203-205.
    13. 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.
    14. Joel Shapiro & David Skeie, 2015. "Information Management in Banking Crises," Review of Financial Studies, Society for Financial Studies, pages 2322-2363.

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    Keywords

    Bank capital ; Bank examination ; Bank holding companies ; Risk assessment;

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