TY - JOUR

T1 - The Effects of Stress Testing on US Banks’ Off-Balance Sheet Activities

AU - Calice, Giovanni

AU - Savoia, Francesco

PY - 2024/3/25

Y1 - 2024/3/25

N2 - AbstractThis paper investigates the effects of the new post‐financial crisis regulatory regime – risk‐based capital ratios (RBC) and stress tests – on banks' off‐balance sheet activities (OBS). We use a panel of US bank holding companies over the period 2001–2018 to examine the relationship between banks' capital levels and OBS activities. Our major finding is that banks significantly reduced their OBS exposure following the introduction of the new capital regulatory framework requirements. In particular, we show that tighter regulatory RBC resulted in a reduction of OBS activities in well‐capitalised banks. Conversely, we find that under‐capitalised banks increased their OBS activities, which suggests the possibility of regulatory arbitrage.

AB - AbstractThis paper investigates the effects of the new post‐financial crisis regulatory regime – risk‐based capital ratios (RBC) and stress tests – on banks' off‐balance sheet activities (OBS). We use a panel of US bank holding companies over the period 2001–2018 to examine the relationship between banks' capital levels and OBS activities. Our major finding is that banks significantly reduced their OBS exposure following the introduction of the new capital regulatory framework requirements. In particular, we show that tighter regulatory RBC resulted in a reduction of OBS activities in well‐capitalised banks. Conversely, we find that under‐capitalised banks increased their OBS activities, which suggests the possibility of regulatory arbitrage.

KW - Finance

KW - General Economics, Econometrics and Finance

U2 - 10.1111/fmii.12196

DO - 10.1111/fmii.12196

M3 - Article

JO - Financial Markets, Institutions and Instruments

JF - Financial Markets, Institutions and Instruments

SN - 1468-0416

ER -