An examination of bank behavior around Federal Reserve stress tests |
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| Affiliation: | 1. Department of Finance, Bentley University, Waltham, MA 02452, USA;2. Ally Financial, Charlotte, NC 28202, USA;3. Carroll School of Management, Boston College, Chestnut Hill, MA 02467, USA;1. ALBA Graduate Business School, The American College of Greece, 6-8 Xenias Str, 11528 Athens, Greece;2. Bank of Greece, 21 E. Venizelos Ave., 10250 Athens, Greece;3. University of Piraeus, Department of Banking and Financial Management, 80 Karaoli & Dimitriou str., 18534 Piraeus, Greece;4. Surrey Business School, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom;1. Stockholm University, 106 91 Stockholm, Sweden, and Research Institute of Industrial Economics, Box 55665, 112 15 Stockholm, Sweden;2. Saïd Business School, University of Oxford, Park End Street, Oxford OX1 1HP, UK;1. Universität Hohenheim, Germany;2. CESifo, Germany;3. Department of Economics, University of Nevada, Reno, USA;4. DIW Berlin, Germany;5. IZA, Germany;6. Oxford University Centre for Business Taxation, United Kingdom |
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| Abstract: | Examining bank behavior around Federal Reserve stress tests, we find that stress test banks increase capital ratios at the starting point for annual stress testing significantly more than non-stress test banks. These trends are completely reversed (and economically significant) in the other quarters. Further, the differences between stress test and non-stress test banks seen in stress test years do not occur in 2010, when the Fed did not conduct a stress test. Results show that, as they enter the stress test, stress test banks lower dividends significantly more than non-stress test banks. Finally, stress test banks spend significantly more on lobbying than non-stress test banks. The results suggest that stress test banks may be managing financial performance and investing in political spending to improve their chances of passing stress tests. |
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