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Stress Tests and Model Monoculture

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1065
Author
Keshav Dogra Keeyoung Rhee
Category
Financial
Date Posted
2018/07/11
Date Retrieved
2022/06/21
Date Revised
2022/06/21
Date Written
2020/12/30
Description
We study whether regulators should reveal stress test results which contain imperfect information about banks financial health. Although disclosure restores market confidence in banks it misclassifies some healthy banks as risky. This encourages banks to choose portfolios that are deemed safe by regulators leading to model monoculture and making the financial system less diversified. Optimal policy involves a commitment to a bang-bang policy that is non-monotonic in the severity of adverse selection problems: the regulator should fully reveal stress test results when adverse selection is very severe or very mild but should never disclose the results otherwise.
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JEL Classifications
D82 G11 G18
Keywords
stress tests adverse selection model monoculture information design
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Pages
68
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URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4141683
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