Consequences of Bank Stress Test Disclosures

Abstract

Whether bank stress test results should be disclosed has been debated since the 2008 financial crisis. Utilizing two novel settings, I examine the effects of these disclosures on risk taking and financial stability. I show that, during a normal economic period, rather than having a disciplining effect, disclosure leads to banks increasing risk taking, consistent with banks facing pressure to offset the costs of stress testing. Despite critics concerns, I find no evidence that disclosure affects financial stability during a normal period. In contrast, during a crisis period, stress test disclosures appear to discipline risk taking for banks performing worse on the stress test. However, systemic risk for these banks also increases, highlighting concerns that disclosure can undermine stability. These results inform the debate regarding whether stress test results should be disclosed and the broader debate regarding the effects of transparency on financial stability.

Keywords: Banks, Stress Test Disclosure, Risk Taking, Financial Stability, Bank Opacity