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Discussion Paper Details

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Title: Stress Testing and Bank Lending

Author(s): Joel Shapiro and Jing Zeng

Publication Date: August 2019

Keyword(s): bank lending, Bank Regulation, reputation and stress tests

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Shapiro, J and Zeng, J. 2019. 'Stress Testing and Bank Lending'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13907