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Disclosure of stress test results

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  • Berlin, Mitchell

    (Federal Reserve Bank of Philadelphia)

Abstract

Should regulatory bank examinations be made public? Regulators have argued that the confidentiality of the examination process promotes frank exchanges between bankers and examiners and that public disclosure of examination results could have a chilling effect. I examine the tradeoffs in a world in which examination results can be kept confidential, but regulatory interventions are observable by market participants, as they typically are for stress tests. Inducing banks to communicate truthfully requires regulators to engage in forbearance, which is priced into banks’ uninsured debt and raises the costs of inducing truthful communication. Regulators that disclose exam results bear higher monitoring costs and impose excessive capital requirements because interventions are not as sensitive to underlying risks. My model predicts that disclosure is optimal when the regulator’s model is relatively inaccurate.

Suggested Citation

  • Berlin, Mitchell, 2015. "Disclosure of stress test results," Working Papers 15-31, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:15-31
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    References listed on IDEAS

    as
    1. Morrison, Alan D. & White, Lucy, 2013. "Reputational contagion and optimal regulatory forbearance," Journal of Financial Economics, Elsevier, vol. 110(3), pages 642-658.
    2. Leitner, Yaron, 2014. "Should regulators reveal information about banks?," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 1-8.
    3. Yaron Leitner, 2012. "Inducing Agents to Report Hidden Trades: A Theory of an Intermediary," Review of Finance, European Finance Association, vol. 16(4), pages 1013-1042.
    4. Edward Simpson Prescott, 2008. "Should bank supervisors disclose information about their banks?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-16.
    5. Andreas Lehnert & Beverly Hirtle, 2015. "Supervisory Stress Tests," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 339-355, December.
    6. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    7. Schuermann, Til, 2014. "Stress testing banks," International Journal of Forecasting, Elsevier, vol. 30(3), pages 717-728.
    8. Morrison, Alan & White, Lucy, 2013. "Reputational Contagion and Optimal Regulatory Forbearance," CEPR Discussion Papers 9508, C.E.P.R. Discussion Papers.
    9. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Stress tests; Disclosure; Bank regulation;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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