Rollover risk and stress test credibility

Research output: Contribution to journalArticlepeer-review

Abstract

This paper studies information disclosure when financial supervisors cannot commit to communicate truthfully. A regulator performs a stress test and chooses whether to disclose bank-specific or aggregate results. Results can be biased at a cost (the higher this cost, the more credible the regulator). Manipulating aggregate information may avoid bank failures, but only if credibility is high enough. Supervisors with little credibility cannot prevent systemic runs by misreporting aggregate information and must release bank-specific reports (truthful or not), triggering partial runs. The results have implications for institutional design: ex ante, a social planner would choose an interior level of credibility.

Original languageEnglish
Pages (from-to)370-399
Number of pages30
JournalGames and Economic Behavior
Volume129
DOIs
StatePublished - Sep 2021

Bibliographical note

Funding Information:
I am very grateful to Bernardo Guimaraes and Itay Goldstein for fruitful discussions and invaluable advice. I also thank the associate editor, two anonymous referees, Rabah Amir, Luis Araujo, Consuelo Silva, Braz Camargo, Vinicius Carrasco, Jose Heleno Faro, Nicol?s Figueroa, Caio Machado, Gabriel Madeira, David Martinez-Miera, Emanuel Ornelas, Joao Paulo Pessoa, Giorgo Sertsios and seminar participants at the Lisbon Meetings in Game Theory and Applications (2017), APET 2017 (Paris), LAMES 2016 (Medell?n), SBE 2016 (Iguazu), the Central Bank of Chile, Erasmus University, the Cleveland Fed, the Federal Reserve Board, Insper, ITAM, Johns Hopkins University, NYU Abu Dhabi, PUC-Chile, the Sao Paulo School of Economics, Tilburg University, Universidad Diego Portales, Universidad Carlos III, Universidad de Chile, Universidad de Los Andes-Chile and University of Sao Paulo for their suggestions. I gratefully acknowledge financial support from the S?o Paulo Research Foundation (Fapesp) through grants #2013/24368-7 and #2014/06069-5, and from ANID/CONICYT (FONDECYT Iniciaci?n #11190202). A previous version of this paper has previously circulated under the title ?Rollover risk and the social value of credibility?.

Funding Information:
I am very grateful to Bernardo Guimaraes and Itay Goldstein for fruitful discussions and invaluable advice. I also thank the associate editor, two anonymous referees, Rabah Amir, Luis Araujo, Consuelo Silva, Braz Camargo, Vinicius Carrasco, Jose Heleno Faro, Nicolás Figueroa, Caio Machado, Gabriel Madeira, David Martinez-Miera, Emanuel Ornelas, Joao Paulo Pessoa, Giorgo Sertsios and seminar participants at the Lisbon Meetings in Game Theory and Applications (2017), APET 2017 (Paris), LAMES 2016 (Medellín), SBE 2016 (Iguazu), the Central Bank of Chile, Erasmus University, the Cleveland Fed, the Federal Reserve Board, Insper, ITAM, Johns Hopkins University, NYU Abu Dhabi, PUC-Chile, the Sao Paulo School of Economics, Tilburg University, Universidad Diego Portales, Universidad Carlos III, Universidad de Chile, Universidad de Los Andes-Chile and University of Sao Paulo for their suggestions. I gratefully acknowledge financial support from the São Paulo Research Foundation (Fapesp) through grants # 2013/24368-7 and # 2014/06069-5 , and from ANID/CONICYT (FONDECYT Iniciación # 11190202 ). A previous version of this paper has previously circulated under the title “Rollover risk and the social value of credibility”.

Publisher Copyright:
© 2021 Elsevier Inc.

Keywords

  • Bank runs
  • Information disclosure
  • Information manipulation
  • Strategic complementarities

Fingerprint

Dive into the research topics of 'Rollover risk and stress test credibility'. Together they form a unique fingerprint.

Cite this