Financial Literacy and the Perceived Value of Stress Testing: An Experiment Using Students in Brazil

Abstract

ABSTRACT We run an experiment to test how consumers of banking services value stress tests performed by their banks. We query respondents about the extent to which they would be willing to trade profitability if banks conduct stress tests, maybe for greater bank financial stability. Our paper connects and innovates in the banking literature by providing empirical evidence of the value of communicating bank stress tests routines to the public from the consumer perspective rather than the regulator’s usual perspective or of the bank itself. By performing stress tests and communicating them to their customers, we find that consumers accept lower remuneration rates of their deposits, suggesting they value stress testing. Our experimental design also contains several queries to estimate the degree of financial literacy of respondents. By combining both perspectives, we find that respondents with higher financial literacy levels are more conservative and replace more profitable banks with less profitable banks that perform and communicate stress testing routines to the public. We explicitly consider measurement error in our data collection process of respondents’ rather subjective financial literacy indicator by introducing external instruments. Such consideration aims at mitigating attenuation bias. We also run several robustness tests with subsets of our sample and non-linear models, such as Probit.