Seminar Series

2023 - 2024

Speaker: Alexander Guembel (TSE).

Title: “Market Information in Banking Supervision: the Role of Stress Test Design ”.

joint with Haina Ding (IAE) and Alessio Ozanne (TSE).

Date: Thursday, May 02nd at 12h30 (Paris Time).

Abstract: Market discipline constitutes pillar 3 of the Basel Committee’s framework for banking regulation. It is widely acknowledged that the effective functioning of market discipline depends on the information environment in which markets operate. In spite of this, little is known about how the design of bank stress tests impacts market discipline. We address this question by providing a model in which market discipline operates indirectly through price signals embedded in bank’s stock prices, and directly through debt roll-over decisions by uninsured creditors who learn from both, the stress test results and the price signals. We show that the optimal stress test is coarse and lenient. This is because markets are useful in reducing the type 2 error of a stress test: they scrutinize and sometimes identify bad banks that erroneously passed the test. Markets are less useful at reducing the test’s type 1 error: a bank that fails the test is likely to reduce the size of its operations, which makes it a less profitable target for speculators. A lenient test design thus optimally leverages market discipline. We extend our model to allow for market discipline to be excessively harsh, as might be the case when banks face debt overhang or the risk of a run. We also study direct interventions by a privately informed supervisor. 

Here is a link to the speaker’s and the FEELab website:

https://www.tse-fr.eu/people/alexander-guembel

https://sites.google.com/view/feelabtbs/

You are cordially invited to participate in the seminar, which will take place in Room 321, Lascrosses building. 

For more information, please contact: Pierre Mella-Barral p.mella-barral@tbs-education.fr