The Information Value of the Stress Test and Bank Opacity - Federal Reserve Bank of New York

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The Information Value of the Stress Test and Bank Opacity

2014 July 2010 Number 460

JEL classification: G01, G21

Authors: Stavros Peristiani, Donald P. Morgan, and Vanessa Savino

We investigate whether the “stress test,” the extraordinary examination of the nineteen largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced information demanded by the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings suggest that the stress test helped quell the financial panic by producing vital information about banks. Our findings also contribute to the academic literature on bank opacity and the value of government monitoring of banks.

Available only in PDF pdf

37 pages / 360 kb

For a published version of this report, see Stavros Peristiani, Donald P. Morgan, and Vanessa Savino, "The Information Value of the Stress Test and Bank Opacity," Journal of Money, Credit and Banking 46, no. 7 (October 2014): 1479-500.

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