Optimal Disclosure of Supervisory Information in the Banking Sector

Abstract

We analyze disclosure of multiple pieces of information by a bank supervisor to a continuum of investors. Specifically, we present a model to explain why a banking authority, observing the state of the banking system, is willing to commit to perform stress tests, and disclose their results. Following the literature on persuasion games we show in a specific multi-receiver model consisting of investors that differ in their beliefs on risk, that disclosing information together with the signal generating process leads to a unique optimum of the risk disclosure process. The paper thus explains why stress tests create value as they will generally improve information disclosure between supervisor and investors.