Working Paper: NBER ID: w30867
Authors: Thomas Schneider; Philip Strahan; Jun Yang
Abstract: 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.
Keywords: bank stress testing; risk management; human capital investment
JEL Codes: G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks that experienced greater losses during the global financial crisis (GFC) (F65) | stronger demand for risk management talent (J23) |
| stress testing (C12) | increase in demand for highly skilled labor (J24) |
| increase in demand for highly skilled labor (J24) | lower systematic risk (G12) |
| increase in demand for highly skilled labor (J24) | lower profitability (L21) |
| stress testing (C12) | risk management practices (G22) |