Diane Perret

finance seminar

Diane Perret

University of Lausanne, Swiss Finance Institute
Stressed banks
Joint with
Roberto Steri

Château Lafarge

Château Lafarge - Salle de séminaires
Château Lafarge
Route des Milles
13290 Les Milles
Tuesday, October 9 2018| 2:30pm

Jean-François Carpantier: jean-francois.carpantier[at]univ-amu.fr
Eric Girardin: eric.girardin[at]univ-amu.fr


We investigate the risk taking incentives of “stressed banks” — the banks that are subject to annual regulatory stress tests in the U.S. since 2011. We document that stringent capital requirements give both stressed and non-stressed banks motives to invest in risky assets, whose expected returns offset banks’ increased cost of funding, which originates from the use of costly equity capital. Regulatory monitoring through stress tests effectively encourages prudent investment from stressed banks, but also provides them with steeper risk-taking incentives through tighter capital requirements. Our results highlight the importance of regulatory monitoring of banks’ portfolios in parallel to setting more stringent capital requirements.