Bank Stress Testing, Human Capital Investment and Risk Management
This paper studies banks’ investment in risk management practices following the Global Financial Crisis and the advent of stress testing. Banks that experienced greater losses during the Crisis exhibit stronger demand for risk management talents. Banks increase their demand for highly skilled stress test labor in anticipation of a test and following poor performance on a test. Following this higher demand, banks exhibit lower systematic risk and lower profitability. While stress testing has modernized banks’ internal risk management by spurring the acquisition of highly skilled risk management talent, recent changes to the tests could erode its efficacy.
Authors received no research funding from sources other than their home institutions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.