MODEL SECRECY AND STRESS TESTS

Yaron Leitner and Basil Williams

No 17-41, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Conventional wisdom holds that the models used to stress test banks should be kept secret to prevent gaming. We show instead that secrecy can be suboptimal, because although it deters gaming, it may also deter socially desirable investment. When the regulator can choose the minimum standard for passing the test, we show that secrecy is suboptimal if the regulator is sufficiently uncertain regarding bank characteristics. When failing the bank is socially costly, then under some conditions, secrecy is suboptimal when the bank's private cost of failure is either sufficiently high or sufficiently low.

Keywords: stress tests; information disclosure; delegation; bank incentives; Fed models (search for similar items in EconPapers)
JEL-codes: D82 G01 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-11-22
New Economics Papers: this item is included in nep-ban
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2017/wp17-41.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:17-41

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().