Stress Tests and Information Disclosure

Itay Goldstein and Yaron Leitner

No 17-28, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We study an optimal disclosure policy of a regulator that has information about banks (e.g., from conducting stress tests). In our model, disclosure can destroy risk-sharing opportunities for banks (the Hirshleifer effect). Yet, in some cases, some level of disclosure is necessary for risk sharing to occur. We provide conditions under which optimal disclosure takes a simple form (e.g., full disclosure, no disclosure, or a cutoff rule). We also show that, in some cases, optimal disclosure takes a more complicated form (e.g., multiple cutoffs or nonmonotone rules), which we characterize. We relate our results to the Bayesian persuasion literature.

Keywords: stress tests; bank regulation; Bayesian persuasion; adverse selection; optimal disclosure (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-08-22
Note: Supersedes WP13-26 & WP15-10/R
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Citations: View citations in EconPapers (7)

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