The impact of the financial crisis of 2007–2008 on the global banking system raised concerns regarding the capital adequacy of banks. While the banks were already conducting internal stress tests before the financial crisis that was not enough to ensure their capital adequacy in the case of an extremely adverse economic scenario. In 2009, under the Obama administration, large Bank Holding Companies (BHCs) were required to conduct stress tests under the supervision of the Federal Reserve Board (FED). This paper evaluates the impact of stress testing on the systemic risk and marginal expected shortfall of Bank Holding Companies.
The objective of this study is to examine if the implementation of stress testing by the FED has affected the systemic risk of Bank Holding Companies. This study considers 55 US Bank Holding Companies with data from 2000 to 2018. The overall sample includes stress test BHCs as well as non-stress test BHCs. I use a variety of techniques including regression discontinuity with kernel triangular approach and OLS regression with fixed effects. The models contain bank-specific control variables including Log of Assets, Pre-Provision Net Revenue to Assets, Loan Loss Provision to Assets Real Estate Loans to Assets, Consumer Loans to Assets, Commercial Loans to Assets, Debt to Capital, Deposits to Assets, as well as capital requirements such as Tier 1 Capital Ratio.
The results suggest that after the regulation of the stress test, the systemic risk of the stress test BHCs is significantly higher than the non-stress test BHCs. However, the stress test BHCs decrease their systemic risk more than the non-stress BHCs. The Tier 1 capital ratio, which is a key ratio that determines whether the BHCs pass the stress test, is found to have a negative effect on systemic risk (SRISK). Furthermore, I show that BHCs see an increase in their systemic risk when they run stress testing for the first time. Finally, the stress test BHCs decrease their systemic risk the quarter before the stress test and increase it a quarter after.
|Commitee:||Depken, Craig, Iqbal, Azhar, Neale, Faith|
|School:||The University of North Carolina at Charlotte|
|School Location:||United States -- North Carolina|
|Source:||MAI 58/03M(E), Masters Abstracts International|
|Subjects:||Economics, Public policy, Banking|
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