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LSF Lunch Seminar - Stressed Banks

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Speaker: Diane Pierret - University of Lausanne
Event date: Thursday, 14 September 2017, 12:30 - 13:45
Place: JFK Building
Ground Floor
Nancy Metz Rooms
29, avenue J.F. Kennedy
L-1855 Luxembourg



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. Stressed banks are subject to more stringent capital requirements compared to other banks depending on the assessed riskiness of their portfolios to a regulatory stress scenario. On one hand, stringent capital requirements provide stressed banks with motives to invest in riskier assets with higher expected returns to offset their increased cost of funding originating from costly equity injections. On the other hand, stressed banks are subject to more invasive monitoring by the regulator, who imposes bank-specific capital requirements on the basis of the assessed risk of their individual portfolios. Monitoring gives incentives to stressed banks to invest in low-risk assets that are less sensitive to the regulatory stress scenario in order to reduce their capital requirement. Our results highlight the importance of regulatory monitoring of banks' portfolios in parallel to setting more stringent capital requirements. 

Data: Invitation_D.Pierret_14.09.2017.pdf 467.00 kB