Aggregate and Bank-specific Information Disclosure in Bank Stress Tests
29 Pages Posted: 14 Jul 2020 Last revised: 15 Aug 2022
Date Written: June 22, 2020
This working paper was written by Mei Li (Gordon S. Lang School of Business and Economics, University of Guelph).
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: Suggested Citation