Featured Product

    BIS on Impact of Stress Tests on Entrepreneurship and Innovation in US

    November 22, 2019

    BIS published a working paper that investigates the implications of regulatory stress tests for entrepreneurship in the United States. The paper shows that stress tests have had potentially unintended side effects on entrepreneurship and innovation at young firms in the United States. The findings suggest that post-crisis financial regulation has led to a reallocation of credit away from risky borrowers. The paper highlights a possible trade-off between financial stability and growth, but does not take a stance on the efficiency or long-run implications of the implemented policy.

    To quantify the overall impact of stress tests, regulators have turned to evaluating the effects of stress tests on financing and the real economy. This paper contributes to the literature that highlights some negative consequences of stress tests on credit supply to small businesses and presents new evidence on the real effects of financial regulation. Regulatory stress tests for the largest banks might have an unintended side effect by curtailing credit to young businesses, which are especially dependent on external financing. These effects should be taken into account when evaluating the overall consequences of financial regulation or higher capital requirements, especially in light of the current debate on declining dynamism and the post-crisis productivity slowdown. The contraction in lending has the potential to stymie entrepreneurship and innovation. The idea that stress tests dampen economic dynamism could help to explain the persistent decline in entrepreneurship since the crisis.

    The banks that have undergone stress tests have sharply reduced home equity loans to small businesses, which is an important source of financing for entrepreneurs. The resulting contraction in loan supply has affected the real economy. By exploiting geographical variation in county exposure to stress-tested banks, the paper shows that counties with a higher exposure have experienced a relative decline in employment at young firms during the recovery, especially in industries that rely more on home equity financing. Additional findings suggest that counties with a higher exposure to stress-tested banks have seen a decline in patent applications by young firms as well as a fall in labor productivity. The fall in labor productivity reflects the disproportionate contribution of young firms to innovation and growth. While the results do not imply that stress tests have reduced overall welfare, they do highlight a possible trade-off between financial stability and economic dynamism.

     

    Related Links

    Keywords: Americas, US, Banking, Stress Testing, Small Business Lending, Loan-Level Data, Credit Risk, Post-Crisis Reforms, BIS

    Featured Experts
    Related Articles
    News

    UK Authorities Consult on Implementation of Basel 3.1 Standards

    The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.

    November 30, 2022 WebPage Regulatory News
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    FSB and NGFS Publish Initial Findings from Climate Scenario Analyses

    The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.

    November 15, 2022 WebPage Regulatory News
    News

    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.

    November 14, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    EU Finalizes Rules Under Crowdfunding Service Providers Regulation

    The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.

    November 08, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8597