South Bend, IN 46556
Institutional Affiliation: Notre Dame
NBER Working Papers and Publications
|March 2020||Bank Stress Testing: Public Interest or Regulatory Capture?|
with , : w26887
We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture.