Abstract We model credibility challenges financial regulators often face when disclosing bank stress test results. Since disclosures influence banks’ risk-taking and depositors’ withdrawal decisions, regulators may have incentives to misreport. We show that regulators can reveal results credibly through imprecise disclosures to both banks and depositors. The regulator reveals only the range or the interval in which the result lies. Crucially, our findings indicate that stress test results can be disclosed credibly without assuming that the regulator is committed to truthful disclosure. (JEL E58, G01, G21)
Arpit Kumar Parija (Wed,) studied this question.