Are Stress-Tested Banks in the U.S. Becoming Similar? Evidence from Convergence Tests

The U.S. bank stress tests were introduced to improve the risk posture and management practices of large and complex banking institutions. This study investigates whether stress-tested banks in the U.S. converge to each other in their levels and determinants of profitability, as well as risk-taking and systemic risk contributions. Our results are consistent with the convergence in profitability, asset quality, management quality, and income diversification of stress-tested banks. Furthermore, stress-tested banks also converge in their income diversification strategies, return volatility, default risk, leverage risk, and systemic risk contributions. This study may shed light on a potential situation where these banks may simultaneously have exposure to the same risks, leaving the financial system more vulnerable to a crisis as a result of the exposed risk