Brattle Associate Suzanne Steele has coauthored an article, “Stress Testing and Bank Business Patterns: A Regression Discontinuity Study,” published in the Journal of Banking and Finance.
The article analyzes the effect that forward-looking disclosure requirements as part of stress testing have on a bank’s portfolio choice and how this relates to lending behavior. The authors relied on the implementation of the Comprehensive Capital Analysis Review stress test on US bank holding companies and used a regression discontinuity design to exploit the quasi-experimental properties of the regulation around the different bank-size policy thresholds. They found that stress testing reduces moral hazard in the banking sector, specifically through an asset risk-shifting mechanism that arises via risk-weighted capital requirements and the simulated tests that stress various assets. In particular, they found that reducing risk results in higher concentrations in lending as banks shift out of higher-risk assets.
The full article, “Stress Testing and Bank Business Patterns: A Regression Discontinuity Study,” is available below.View Article