Do stress tests affect bank liquidity creation?

Nguyen, Thach Vu Hong; Ahmed, Shamim; Chevapatrakul, Thanaset; Onali, Enrico

Abstract

We examine the impact of Federal Reserve stress tests from 2009 to 2016 on U.S. bank liquidity creation. Empirical results show that regulatory stress tests have a negative effect on both on-and off-balance sheet bank liquidity creation and asset-side liquidity creation. As banks enter the stress tests, they reduce their liquidity creation to avoid failing the stress tests. These results are consistent with the hypothesis that banks manage their risk exposures to meet higher capital requirements. The negative effect of stress testing on liquidity creation continues to persist in the quarters after the stress tests. Finally, stress test banks appear to increase liability-side liquidity creation. These findings highlight that the enhanced financial stability from greater regulatory scrutiny may be achieved at the expense of financial intermediation. JEL Classification: G21; G28.

Citation

Nguyen, H., Vu, T., Ahmed, S., Chevapatrakul, T., & Onali, E. (2020). Do stress tests affect bank liquidity creation?. Journal of Corporate Finance, 64, https://doi.org/10.1016/j.jcorpfin.2020.101622

• Journal Article Type: Article
• Acceptance Date: Mar 24, 2020
• Online Publication Date: Apr 13, 2020
• Publication Date: 2020-10
• Deposit Date: Mar 25, 2020
• Publicly Available Date: Oct 14, 2021
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 64
• Article Number: 101622
• DOI: https://doi.org/10.1016/j.jcorpfin.2020.101622
• Keywords: Strategy and Management; Economics and Econometrics; Business and International Management; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/4202284
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0929119920300663