Arbeitspapier

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

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.

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

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

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

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

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Gick, Wolfgang
  • Pausch, Thilo
  • Deutsche Bundesbank

Time of origin

  • 2012

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