Should Banks Stress Test Results Be Disclosed?. An Analysis of the Costs and Benefits 12+

📓 Should Banks' Stress Test Results be Disclosed? An Analysis of the Costs and Benefits reviews the theoretical literature on disclosure, tying it to the recent policy debate on whether stress-test results should be disclosed. The authors review the nature of stress tests required by the Dodd-Frank act and conducted by the Federal Reserve, an important aspect of which is the public disclosure of the results. Then, it compares the arguments for and against the disclosure of banks' stress test results. While the rationale for disclosing stress test results may seem intuitive in the wake of the financial crisis, some argue that disclosing these results may actually have negative unintended consequences. Using insights from recent theoretical models, the authors provide a framework for understanding these negative unintended consequences.The authors argue that the benefits of disclosing stress-test results are clear: stress tests may uncover unique information about banks allowing both bank supervisors and market participants to exercise discipline on the bank's behavior. But because banks operate in second-best environments that are prone to externalities, there are inherent costs associated with such disclosures, and proper understanding of the sources of these costs would better inform the debate and guide regulators when designing stress tests and handling the disclosures.Should Banks' Stress Test Results be Disclosed? An Analysis of the Costs and Benefits is or...