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Do stress tests affect bank liquidity creation?

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


Hong Nguyen

Thach Vu

Shamim Ahmed

Thanaset Chevapatrakul

Enrico Onali


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.

Journal Article Type Article
Journal Journal of Corporate Finance
Print ISSN 0929-1199
Publisher Elsevier
Peer Reviewed Peer Reviewed
APA6 Citation Nguyen, H., Vu, T., Ahmed, S., Chevapatrakul, T., & Onali, E. (in press). Do stress tests affect bank liquidity creation?. Journal of Corporate Finance,
Keywords Stress testing; Bank liquidity creation; SCAP; CCAR * Corresponding author