How Stress Tests Affect Banks’ Risk Taking
In the aftermath of the 2008 financial crisis, the US Congress approved the Dodd–Frank Wall Street Reform and Consumer Protection Act to help design a safe and sound banking system.
In the Act, two essential provisions feature more stringent regulatory capital requirements and regulatory stress tests. Regulatory stress tests have a contrasting effect on bank risk taking. SFI professors Diane Pierret and Roberto Steri from the University of Lausanne examine how capital requirements determined on the basis of regulatory stress tests influence the riskiness of banks’ investments. Mate Nemes from UBS Investment Bank highlights in the practical part of the publication additional points to be considered with regard to the effectiveness of the dual approach.
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