Stress tests may be poor guide to capital levels – BIS paper
Authors develop model of how “noisy” tests may cause problems for regulators
Using stress-test results to set capital requirements may be counterproductive in some circumstances, research published by the Bank for International Settlements finds.
Authors Tirupam Goel and Isha Agarwal note earlier literature has found empirical evidence that stress tests are “noisy” and therefore may give regulators “imprecise signals” on bank resilience. They develop a theoretical framework to explore the implications of this noise.
In the model, regulators use the signals they receive
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