Disclosure of Stress Test Results

29 Pages Posted: 15 Aug 2015

See all articles by Mitchell Berlin

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department

Date Written: August 13, 2015

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.

Keywords: Stress Tests, Disclosure, Bank Regulation

JEL Classification: G2, G21, G28

Suggested Citation

Berlin, Mitchell, Disclosure of Stress Test Results (August 13, 2015). FRB of Philadelphia Working Paper No. 15-31. Available at SSRN: https://ssrn.com/abstract=2643801 or http://dx.doi.org/10.2139/ssrn.2643801

Mitchell Berlin (Contact Author)

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
215-574-3822 (Phone)
215-574-4364 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
61
Abstract Views
443
rank
356,117
PlumX Metrics