Model Secrecy and Stress Tests

36 Pages Posted: 26 Nov 2017

See all articles by Yaron Leitner

Yaron Leitner

Washington University in St. Louis, Olin Business School

Basil Williams

New York University (NYU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-11-22

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.

Keywords: stress tests, information disclosure, delegation, bank incentives, Fed models

JEL Classification: D82, G01

Suggested Citation

Leitner, Yaron and Williams, Basil, Model Secrecy and Stress Tests (2017-11-22). FRB of Philadelphia Working Paper No. 17-41, Available at SSRN: https://ssrn.com/abstract=3077205

Yaron Leitner (Contact Author)

Washington University in St. Louis, Olin Business School

United States

Basil Williams

New York University (NYU) ( email )

19 W 4th Street
New York, NY 10003-711
United States

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