Adding stress in banking: Stress tests and risk-taking sentiments

front of bank

The risk culture of the financial sector is a crucial, and determinant, component of the sector's health writ large.

The lax corporate risk culture of the 2008 Financial Crisis has been cited as a leading contributor to that recession, whereas improvements in that same culture helped mitigate negative effects during the recent COVID-19 pandemic.

In this article, written by lead author Raffi E. García, Cook Center Visiting Faculty, the authors undertake an empirical analysis of how stress tests at financial institutions affect the company cultures as well as both the risk and performance of these banks.

Key Findings

  • The authors find that stress-tested banks boost their risk-taking culture and corporate culture while simultaneously reducing risk and improving performance.
  • Stress-tested banks, relative to non-stress-tested banks, have improved sentiments in a number of key areas.