Working Paper: NBER ID: w26887
Authors: Thomas Ian Schneider; Philip E. Strahan; Jun Yang
Abstract: 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.
Keywords: Bank Stress Testing; Regulatory Capture; Public Interest; Financial Regulation
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large trading banks (G21) | tougher stress tests (G28) |
| regulatory connections (K20) | leniency in stress test evaluations (G28) |
| political donations (D72) | leniency in stress test evaluations (G28) |
| bank size (G21) | regulatory oversight (G18) |
| regulatory oversight (G18) | stress test outcomes (C52) |