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

We study the effects of transparency disclosures on U.S. banks' relayed culture. Using bank stress -test regulations and a regression -discontinuity design, we exploit the quasi -experimental properties around bank -size policy thresholds. We find that stress -tested banks improve their communicated risk -taking culture and overall corporate culture by improving the sentiment around drivers of risk -taking culture, such as leadership. Stress testing, however, has the unintended consequence of negatively affecting sentiment regarding teamwork and innovation. We find that only banks with strong risk -taking -culture sentiments further reduce their riskweighted assets and risky loans while increasing profitability, highlighting the distinctive role of the risk subculture in banking.