Exploiting a 2014 change in credit default swap (CDS) contracts on European banks, we introduce a measure of market expectation of European government support for distressed banks. CDS contract terms were changed to cover losses from “government intervention” and related bail-in events. For...

Regulatory stress tests have become the primary tool for setting capital requirements at the largest U.S. banks. The Federal Reserve uses confidential models to evaluate bank-specific outcomes for bank-specific portfolios in shared stress scenarios. As a matter of policy, the same models are...

Regulatory stress tests have become a key tool for setting bank capital levels. Publicly disclosed results for four rounds of stress tests suggest that as the stress testing process has evolved, its outcomes have become more predictable and therefore arguably less informative. In particular,...