Abstract
We study stress tests as Bayesian persuasion within the fundamental bank run framework. This paper shows that the optimal disclosure policy depends on the liquidation cost of the long-term asset. In particular, when the liquidation cost is high, the optimal stress test partially discloses information about banks' asset: it reduces the likelihood of bank runs. When the liquidation cost is low, the optimal stress test fully discloses information: it increases the likelihood of enjoying the high asset return. The central trade-off in the design of a stress test is between the bank run cost and the high asset return. The theory suggests regulatory policy coordination - joint design of the stress test and other policies that affect asset market liquidity.
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