Persuasion by stress testing: Optimal disclosure of supervisory information in the banking sector

Arbeitspapier

The game-theoretical analysis of this paper shows that stress tests that cover the entire banking sector (macro stress tests) can be performed by institutional supervisors to improve welfare. In a multi-receiver framework of Bayesian persuasion we show that a banking authority can create value when committing to disclose the stress-testing methodology (signal-generating process) together with the stress test result (signal). Disclosing two pieces of information is a typical procedure used in stress tests. By optimally choosing these two signals, supervisors can deliver superior information to prudent investors and enhance welfare. The paper offers a new theory to explain why stress tests are generally welfare enhancing. We also offer a treatment of the borderline case where the banking sector is hit by a crisis, in which case the supervisor will optimally disclose an uninformative signal.

Object Details

• ISBN: 978-3-86558-868-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bundesbank Discussion Paper ; No. 32/2012

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Stress Tests ; Supervisory Information ; Bayesian Persuasion ; Multiple Receivers ; Disclosure

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gick, Wolfgang ; Pausch, Thilo
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/67402
• Last update: 10.03.2025, 11:42 AM CET