Aggregate and Bank-specific Information Disclosure in Bank Stress Tests

29 Pages Posted: 14 Jul 2020

See all articles by Mei Li

Mei Li

University of Guelph

Date Written: June 22, 2020

Abstract

This paper studies how a bank regulator’s aggregate and bank-specific information dis-closure policy affects social welfare. We apply global games to studying an economy where depositors, with strategic complementarities among them, face uncertainties about both aggregate and bank-specific information of a bank. Then we examine how disclosure policy of a bank regulator on the bank’s aggregate and bank-specific information affects welfare. With the assumption that bank depositors rely on the bank regulator to collect aggregate bank performance information but have precise private information about bank-specific in-formation, we find that more precise aggregate information disclosed by the bank regulator improves welfare when bank fundamentals are either extremely strong or weak, but tends to reduce welfare when the fundamentals are in the intermediate range where coordination plays a key role. In contrast, more precise bank-specific information disclosed by the regulator tends to increase welfare, even when the fundamentals are in the intermediate range.

Keywords: bank information disclosure, global games, bank stress tests

JEL Classification: D8, E58, G28

Suggested Citation

Li, Mei, Aggregate and Bank-specific Information Disclosure in Bank Stress Tests (June 22, 2020). Available at SSRN: https://ssrn.com/abstract=3632568 or http://dx.doi.org/10.2139/ssrn.3632568

Mei Li (Contact Author)

University of Guelph ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

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