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Working Paper
REGULATING A MODEL
REVISED: 5/2018: We study a situation in which a regulator relies on models produced by banks in order to regulate them. A bank can generate more than one model and choose which models to reveal to the regulator. The regulator can find out the other models by monitoring the bank, but, in equilibrium, monitoring induces the bank to produce less information. We show that a high level of monitoring is desirable when the bank's private gain from producing more information is either sufficiently high or sufficiently low (e.g., when the bank has a very little or very large amount of debt). When ...
Working Paper
Stress tests and information disclosure
Supersedes Working Paper 13-26 . We study an optimal disclosure policy of a regulator that has information about banks? ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion ...
Working Paper
Stress Tests and Information Disclosure
We study an optimal disclosure policy of a regulator that has information about banks (e.g., from conducting stress tests). In our model, disclosure can destroy risk-sharing opportunities for banks (the Hirshleifer effect). Yet, in some cases, some level of disclosure is necessary for risk sharing to occur. We provide conditions under which optimal disclosure takes a simple form (e.g., full disclosure, no disclosure, or a cutoff rule). We also show that, in some cases, optimal disclosure takes a more complicated form (e.g., multiple cutoffs or nonmonotone rules), which we characterize. We ...