Stress tests are supposed to ensure your access to credit during the next downturn, but some critics claim that they also limit your access to credit today. We test that theory.
As we approach the 10th anniversary of the nation’s first supervisory stress test, some analysts argue that stress tests have gone too far and that large banks have inefficiently restricted credit. This article explores the preliminary evidence about the effects of stress tests on the credit supply. However, before considering the evidence, we need to know how the stress tests work in the U.S. and why the stress tests might reduce credit growth.
This article appeared in the First Quarter 2020 edition of Economic Insights. Download and read the full issue.