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Persuasion by Stress Testing - Optimal Disclosure of Supervisory Information in the Banking Sector
Company: Deutsche Bundesbank
Company Url: Click here to open
Year Of Publication: 2012
Month Of Publication: March
Pages: 48
Download Count: 6
View Count: 1857
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 12-29-2013
Publisher: Administrator
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.
Gick, Wolfgang Sign in to follow this author
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