Adding stress in banking: Stress tests and risk-taking sentiments

Raffi E. García, Jyothsna G. Harithsa, Abena Owusu

Research output: Contribution to journalReview articlepeer-review

Abstract

We study the effects of transparency disclosures on U.S. banks’ relayed culture. Using bank stress-test regulations and a regression-discontinuity design, we exploit the quasi-experimental properties around bank-size policy thresholds. We find that stress-tested banks improve their communicated risk-taking culture and overall corporate culture by improving the sentiment around drivers of risk-taking culture, such as leadership. Stress testing, however, has the unintended consequence of negatively affecting sentiment regarding teamwork and innovation. We find that only banks with strong risk-taking-culture sentiments further reduce their risk-weighted assets and risky loans while increasing profitability, highlighting the distinctive role of the risk subculture in banking.

Original languageEnglish
Article number102596
JournalJournal of Corporate Finance
Volume87
DOIs
StatePublished - Aug 2024

Keywords

  • Bank stress test
  • Corporate culture
  • Corporate risk culture
  • Regression discontinuity
  • Transparency disclosure

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