Bank Capital Buffers and Lending, Firm Financing and Spending : What Can We Learn from Five Years of Stress Test Results?

We use bank-firm matched data to study how the capital buffers that large U.S. banks must satisfy to “pass” the Federal Reserve’s stress tests impact banks’ lending and firms’ loan volumes, overall debt, investment, and employment. We find that larger stress-test capital buffers lead to reductions in banks’ lending, modest increases in loan rates and spreads, and reductions in new loan originations. However, we find no impact of higher capital buffers on firms’ overall debt, investment, and employment, suggesting that firms find other credit sources to substitute for the reduction in loans from banks that participate in the stress tests