Suzanne Steele Authors Article on Stress Testing and Bank Business Patterns in the Journal of Banking and Finance

Brattle Associate Suzanne Steele has coauthored an article, “Stress Testing and Bank Business Patterns: A Regression Discontinuity Study,” published in the Journal of Banking and Finance.

The article analyzes the effect that forward-looking disclosure requirements as part of stress testing have on a bank’s portfolio choice and how this relates to lending behavior. The authors relied on the implementation of the Comprehensive Capital Analysis Review stress test on US bank holding companies and used a regression discontinuity design to exploit the quasi-experimental properties of the regulation around the different bank-size policy thresholds. They found that stress testing reduces moral hazard in the banking sector, specifically through an asset risk-shifting mechanism that arises via risk-weighted capital requirements and the simulated tests that stress various assets. In particular, they found that reducing risk results in higher concentrations in lending as banks shift out of higher-risk assets.

The full article, “Stress Testing and Bank Business Patterns: A Regression Discontinuity Study,” is available below.