Stress Testing and Bank Lending
|Speaker:||Joel Shapiro, University of Oxford|
|Date:||Tuesday 27 February 2018|
|Location:||Pearson teaching room, Building: one|
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.