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Discussion Paper
Becoming More Alike? Comparing Bank and Federal Reserve Stress Test Results
Stress tests have become an important method of assessing whether financial institutions have enough capital to operate in bad economic conditions. Under the provisions of the Dodd-Frank Act, both the Federal Reserve and large U.S. bank holding companies (BHCs) are required to do annual stress tests and to disclose these results to the public. While the BHCs’ and the Federal Reserve’s projections are made under the same macroeconomic scenario, the results differ, primarily because of differences in the models used to make the projections. In this post, we look at the 2014 stress test ...
Working Paper
Mandatory Disclosure and Financial Contagion
This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when ...