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Design of Macro-prudential Stress Tests

Author

Listed:
  • Dmitry Orlov

    (University of Rochester)

  • Andy Skrzypacz

    (Stanford Graduate School of Business)

  • Pavel Zryumov

    (University of Rochester)

Abstract

We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information; when systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine the level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.

Suggested Citation

  • Dmitry Orlov & Andy Skrzypacz & Pavel Zryumov, 2018. "Design of Macro-prudential Stress Tests," 2018 Meeting Papers 913, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:913
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    References listed on IDEAS

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    Cited by:

    1. Ana Babus & Maryam Farboodi, 2020. "The Hidden Costs of Strategic Opacity," NBER Working Papers 27471, National Bureau of Economic Research, Inc.
    2. Walther, Ansgar & White, Lucy, 2019. "Rules versus Discretion in Bank Resolution," CEPR Discussion Papers 14048, C.E.P.R. Discussion Papers.
    3. Goldstein, Itay & Leitner, Yaron, 2018. "Stress tests and information disclosure," Journal of Economic Theory, Elsevier, vol. 177(C), pages 34-69.
    4. Yaron Leitner & Basil Williams, 2018. "Model Secrecy and Stress Tests," 2018 Meeting Papers 566, Society for Economic Dynamics.
    5. Shapiro, Joel & Zeng, Jing, 2019. "Stress Testing and Bank Lending," CEPR Discussion Papers 13907, C.E.P.R. Discussion Papers.
    6. Christian König-Kersting & Stefan T. Trautmann & Razvan Vlahu, 2020. "Bank instability: Interbank linkages and the role of disclosure," DNB Working Papers 665, Netherlands Central Bank, Research Department.
    7. Ana Babus & Maryam farboodi, 2019. "The Hidden Costs of Strategic Opacity," 2019 Meeting Papers 1508, Society for Economic Dynamics.
    8. Leitner, Yaron & Yilmaz, Bilge, 2019. "Regulating a model," Journal of Financial Economics, Elsevier, vol. 131(2), pages 251-268.
    9. Cong, Lin William & Grenadier, Steven R. & Hu, Yunzhi, 2020. "Dynamic interventions and informational linkages," Journal of Financial Economics, Elsevier, vol. 135(1), pages 1-15.
    10. Ding, Haina & Guembel, Alexander, 2020. "Market Information in Banking Supervision: The Role of Stress Test Design," TSE Working Papers 20-1144, Toulouse School of Economics (TSE).

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