Stress testing effects on portfolio similarities among large US Banks

Abstract: We use an expansive regulatory loan-level dataset to analyze how the portfolios of the largest US banks have evolved since 2011. In particular, we analyze how the commercial and industrial and commercial real estate loan portfolios have changed in response to stress-testing requirements stipulated in the 2010 Dodd-Frank Act. We find that the largest US banks, which are subject to stress testing, have become more similar since the current form of the stress testing was implemented in 2011. We also find that banks with poor stress test results tend to adjust their portfolios in a way that makes them more similar to the portfolios of banks that performed well in the stress testing. In general, stress testing has resulted in more diversified bank portfolios in terms of sectoral and regional distributions. However, we also find that all the large US banks diversified in a similar way, creating a more concentrated systemic portfolio in the aggregate.

Keywords: concentration; systemic risk; portfolio similarity; stress tests; bank correlations;

JEL Classification: G28; G21;

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Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Current Policy Perspectives

Publication Date: 2019-04-01

Number: 19-1

Pages: 40 pages