RT Monograph
SR 00
A1 Ding, Haina
A1 Guembel, Alexander
A1 Ozanne, Alessio
T1 Market Information in Banking Supervision: The Role of Stress Test Design
YR 2022
FD 2022-10-03
VO 20-1144
SP 58
K1 Feedback, risk shifting, information design
AB This paper studies the optimal degree of leniency in a bank stress test, when poorly capitalized banks engage in risk shifting and a banking supervisor can intervene to prevent it. The stress test directly provides the supervisor with noisy information about whether or not a bank is well capitalized. Furthermore, the stress test outcome aspects a speculator's incentives to acquire costly information about the bank and trade in its shares. This in turn aspects the amount of market information available to the supervisor when she takes her intervention decision. We show that a supervisor optimally distorts the stress test towards leniency for banks whose shares are relatively illiquid, and about whom the supervisor has little private information. When the supervisor has substantial private information about a bank whose shares are fairly liquid, it is optimal to apply a conservative stress test.
T2 TSE Working Paper
PB TSE Working Paper
PP Toulouse
AV Published
LK https://publications.ut-capitole.fr/id/eprint/41785/
UL http://tse-fr.eu/pub/124671