Working Paper

The Impact of Post Stress Tests Capital on Bank Lending

Abstract: We investigate one channel through which the annual bank stress tests, as part of the Federal Reserve?s Comprehensive Capital Analysis and Review (CCAR) review, could unexpectedly affect the provision of bank credit. To quantify the impact of the stress tests on lending, we compare the capital implied by the supervisory stress tests with the level of capital implied by the banks? own models, a measure we call the capital gap. We then study the impact of the capital gap on the loan growth of BHCs subject to supervisory or bank-run stress tests. Consistent with previous results in the bank capital literature, we find evidence that better capitalized banks have higher loan growth. The additional capital implied by the supervisory stress tests (capital gap) does not appear to unduly restrict loan growth.

Keywords: Bank capital; Bank lending; Regulatory capital; Stress tests;

JEL Classification: G28; G21;

https://doi.org/10.17016/FEDS.2018.087

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-12-21

Number: 2018-087

Pages: 49 pages