Banking stress test effects on returns and risks

We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks’ equity prices, credit risk, systematic risk, and systemic risk during the 2009–15 period.  We find little evidence that stress tests affected equity returns of large US banks in most years. CDS spreads declined in response to the disclosure of stress test results in 2009 and 2012–13. We also find that banks’ systematic risk, as measured by betas, declined in some years after the publication of stress test results. Our  evidence suggests that stress tests affect systemic risk.
 
Keywords: stress tests, bank equity returns, CDS spreads, bank betas, systemic risk.
JEL classifications: G21, G28.

Working paper no. 419