“The Coordination Role of Stress Test Disclosure in Bank Risk” by Dr. Carlos Corona
Dr. Carlos Corona
Associate Professor of Accounting
Tepper School of Business
Carnegie Mellon University
We examine whether stress-test disclosures distort banks’ risktaking decisions. We study a model in which a regulator may choose to rescue banks in the event of concurrent bank failures. Our analysis reveals a novel coordination role of stress-test disclosures. By disclosing stress tests, a regulator informs all banks of the failure likelihood of other banks, which facilitates bank’s coordination in risk-taking. We find that disclosing stress tests always increases the rate of bank failure and, unless bank failure externalities are sufficiently severe, disclosure also increases banks’ average risk and the bailout likelihood.