The Coordination Role of Stress Test Disclosure in Bank Risk Taking

53 Pages Posted: 5 Jul 2018 Last revised: 31 Jul 2018

See all articles by Carlos Corona

Carlos Corona

Carnegie Mellon University

Lin Nan

Purdue University

Gaoqing Zhang

University of Minnesota

Date Written: July 1, 2017

Abstract

We examine whether stress-test disclosures distort banks' risk-taking decisions. We study a model in which a regulator may choose to rescue banks in the event of concurrent bank failures. Our analysis reveals a novel coordination role of stress-test disclosures. By disclosing stress tests, a regulator informs all banks of the failure likelihood of other banks, which facilitates bank's coordination in risk-taking. We find that disclosing stress tests always increases the rate of bank failure and, unless bank failure externalities are sufficiently severe, disclosure also increases banks' average risk and the bailout likelihood.

Suggested Citation

Corona, Carlos and Nan, Lin and Zhang, Gaoqing, The Coordination Role of Stress Test Disclosure in Bank Risk Taking (July 1, 2017). Available at SSRN: https://ssrn.com/abstract=3201973 or http://dx.doi.org/10.2139/ssrn.3201973

Carlos Corona

Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Lin Nan

Purdue University ( email )

100 S Grant St
West Lafayette, IN 47907
United States
7654960551 (Phone)

Gaoqing Zhang (Contact Author)

University of Minnesota ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

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