Persuasion by stress testing: Optimal disclosure of supervisory information in the banking sector

Wolfgang Gick and Thilo Pausch ()

No 32/2012, Discussion Papers from Deutsche Bundesbank

Abstract: The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal.

Keywords: Stress Tests; Supervisory Information; Bayesian Persuasion; Multiple Receivers; Disclosure (search for similar items in EconPapers)
JEL-codes: D81 D83 G28 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba and nep-cta
References: View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:322012

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