Design of Macro-Prudential Stress Tests
75 Pages Posted: 1 Jun 2017 Last revised: 18 May 2018
Date Written: May 3, 2018
We study the design of stress tests that provide information about systemic risk in banks’ portfolios and impose contingent capital requirements to prevent bankruptcies. The optimal stress test discloses information partially: when risk is low, capital requirements reflect full information and set mild restrictions on dividend issuance; when risk is high, the test is not fully transparent and requires banks to hold precautionary liquidity. With heterogeneous banks, optimal stress tests reveal information gradually and require weak banks raise capital first. The results are robust to allowing bailouts and equity issuance. We discuss how stress tests interact with ex-ante portfolio choice.
Keywords: Stress Tests, Systemic Risk, Capital Requirements, Information Design, Dynamic Disclosure
JEL Classification: G01, G28, D61, D83
Suggested Citation: Suggested Citation