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Persuasion by stress testing: Optimal disclosure of supervisory information in the banking sector

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  • Gick, Wolfgang
  • Pausch, Thilo

Abstract

The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal.

Suggested Citation

  • Gick, Wolfgang & Pausch, Thilo, 2012. "Persuasion by stress testing: Optimal disclosure of supervisory information in the banking sector," Discussion Papers 32/2012, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:322012
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    Cited by:

    1. Ludmila Matyskova, 2018. "Bayesian Persuasion with Costly Information Acquisition," CERGE-EI Working Papers wp614, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Paul Glasserman & Chulmin Kang & Wanmo Kang, 2013. "Stress Scenario Selection by Empirical Likelihood," Working Papers 13-07, Office of Financial Research, US Department of the Treasury.
    3. Georgescu, Oana-Maria & Gross, Marco & Kapp, Daniel & Kok, Christoffer, 2017. "Do stress tests matter? Evidence from the 2014 and 2016 stress tests," Working Paper Series 2054, European Central Bank.
    4. Matthew Gentzkow & Emir Kamenica, 2014. "Costly Persuasion," American Economic Review, American Economic Association, vol. 104(5), pages 457-462, May.
    5. Horváth, Roman & Vaško, Dan, 2016. "Central bank transparency and financial stability," Journal of Financial Stability, Elsevier, vol. 22(C), pages 45-56.

    More about this item

    Keywords

    Stress Tests; Supervisory Information; Bayesian Persuasion; Multiple Receivers; Disclosure;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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