Stress Testing and Bank Lending

Finance

Speaker:Joel Shapiro, University of Oxford
Date: Tuesday 27 February 2018
Time: 13:45
Location: Pearson teaching room, Building: one

Further details

Abstract

By assessing and dealing with bank risk (e.g. through stress tests), regulators affect the risk taken. In a model where the regulator has private information about the cost of capital requirements, stress tests may be (1) lenient in order to encourage lending in the future or (2) tough in order to reduce the risk of costly bank defaults. These equilibria may coexist, and due to the strategic complementarity between the regulator's stress testing strategy and the bank's lending decision, may lead to fragility.