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Stress tests and information disclosure

Author

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  • Goldstein, Itay
  • Leitner, Yaron
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.

Suggested Citation

  • Goldstein, Itay & Leitner, Yaron, 2018. "Stress tests and information disclosure," Journal of Economic Theory, Elsevier, vol. 177(C), pages 34-69.
    • Handle: RePEc:eee:jetheo:v:177:y:2018:i:c:p:34-69
    DOI: 10.1016/j.jet.2018.05.013
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian persuasion; Optimal disclosure; Stress tests; Bank regulation; Adverse selection;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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