Stress Tests and Information Disclosure

We study an optimal disclosure policy of a regulator that has information about banks (e.g., from conducting stress tests). We focus on the following tradeo¤: Disclosing some information may be necessary to prevent a mar-ket breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer e¤ect). We \u85nd that during normal times, no disclosure is optimal, but during bad times, some disclosure is necessary. We characterize its optimal form, e.g., under what conditions a simple cuto ¤ rule is optimal. We relate our results to the Bayesian persuasion literature