Model Secrecy and Stress Tests
57 Pages Posted: 15 Jun 2020 Last revised: 3 Sep 2020
Date Written: May 19, 2020
We study whether regulators should reveal the models they use to stress test banks. In our setting, revealing leads to gaming, but not revealing can induce banks to under-invest in socially desirable assets for fear of failing the test. We show that although the regulator can solve this under-investment problem by making the test easier, some disclosure may still be optimal, which under some conditions takes the simple form of a cutoff rule. We characterize the optimal disclosure policy combined with test difficulty, provide comparative statics, and relate our results to recent policies. We also offer applications beyond stress tests.
Keywords: Stress Tests, Bayesian Persuasion, Information Disclosure, Delegation, Bank Incentives, Fed Models
JEL Classification: D82, G01, G28
Suggested Citation: Suggested Citation