The effects of stress testing on US banks' off‐balance sheet activities.

Calice, Giovanni; Savoia, Francesco

This 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.

BANKING laws; BANK holding companies; BASEL III (2010); FINANCIAL stress tests; BANKING industry; CAPITAL requirements; BANK capital

Financial Markets, Institutions & Instruments, 2024, Vol 33, Issue 4, p447

0963-8008

Academic Journal

10.1111/fmii.12196