Full Disclosure and Financial Stability: How Does the Market Digest the Transparency Shock?

Abstract

Since macro-prudential stress tests have become the main instruments of the supervisory authorities toolkit, the debate on the effect of their results disclosure inflamed. Our work aims at providing a framework that, via a dynamic estimation of the betas, allows to observe the impact of the new information flow on the stability of the banking system. What we find is that, contrary to literature wisdom, almost all banks betas decrease, as the transparency shock contributes to an overall systemic risk drop.

Keywords: Disclosure Policy, Stress Test, State-Space Model, Market Reaction, Risk Assessment

JEL Classification: C32, G12, G14, G28