IDEAS home Printed from https://ideas.repec.org/p/red/sed018/566.html
   My bibliography  Save this paper

Model Secrecy and Stress Tests

Author

Listed:
  • Yaron Leitner

    (Federal Reserve Bank of Philadelphia)

  • Basil Williams

    (New York University)

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. Finally, we relate our results to several current and proposed stress testing policies.

Suggested Citation

  • Yaron Leitner & Basil Williams, 2018. "Model Secrecy and Stress Tests," 2018 Meeting Papers 566, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:566
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2018/paper_566.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Miguel Faria-e-Castro & Joseba Martinez & Thomas Philippon, 2017. "Runs versus Lemons: Information Disclosure and Fiscal Capacity," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1683-1707.
    2. Matthieu Bouvard & Pierre Chaigneau & Adolfo De Motta, 2015. "Transparency in the Financial System: Rollover Risk and Crises," Journal of Finance, American Finance Association, vol. 70(4), pages 1805-1837, August.
    3. Milton Harris & Artur Raviv, 2005. "Allocation of Decision-making Authority," Review of Finance, European Finance Association, vol. 9(3), pages 353-383.
    4. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
    5. Manuel Amador & Kyle Bagwell, 2013. "The Theory of Optimal Delegation With an Application to Tariff Caps," Econometrica, Econometric Society, vol. 81(4), pages 1541-1599, July.
    6. Gissler, Stefan & Oldfather, Jeremy & Ruffino, Doriana, 2016. "Lending on hold: Regulatory uncertainty and bank lending standards," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 89-101.
    7. Milton Harris & Artur Raviv, 2005. "Allocation of Decision-making Authority," Review of Finance, Springer, vol. 9(3), pages 353-383, September.
    8. Steven R. Grenadier & Andrey Malenko & Nadya Malenko, 2016. "Timing Decisions in Organizations: Communication and Authority in a Dynamic Environment," American Economic Review, American Economic Association, vol. 106(9), pages 2552-2581, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed018:566. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.