Using banks' internal models for regulatory purposes, while aimed at making capital requirements more accurate, invites regulatory arbitrage. I show how the strategic use of risk models can be avoided by penalizing banks with low risk-weights when they suffer abnormal losses. As defaulting banks...

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...

The regulatory use of banks' internal models aims at making capital requirements more accurate and reducing regulatory arbitrage, but may also give banks incentives to choose their risk models strategically. Current policy answers to this problem include the use of risk-weight floors and...

The regulatory use of banks' internal models makes capital requirements more risk-sensitive but invites regulatory arbitrage. I develop a framework to study bank regulation with strategic selection of risk models. A bank supervisor can discourage arbitrage by auditing risk models, and implements...

This paper explores three possible transmission channels for transition risk shocks to the financial system in Norway. First, we estimate the direct firm-level impact of a substantial increase in domestic carbon prices under severe assumptions. Second, we map the impact of a drastic increase in...

There is growing acknowledgement among policymakers that climate change may give rise to potentially catastrophic financial risk and impact financial stability. This paper explores the specific features of climate-related financial risks (CRFR), drawing on a growing body of macrofinancial...

This paper builds a framework to quantify the financial stability implications of climate-related transition risk in Colombia. We explore risks imposed on the banking system based on scenarios of an increase in the domestic carbon tax by using bank- and firm-level data. Focusing on the...

Stress testing has become a tool of choice in banking for risk managers and regulators alike, and it is used more widely as a way to assess resilience to severely adverse events. Yet even the most creative risk manager would have been challenged to design a scenario that would have adequately...

This paper argues that stress tests encompassing the entire banking sector (macro stress tests) can be designed to improve welfare. We develop a multi-receiver framework of Bayesian persuasion to show that a banking supervisor can create value when he commits to disclose the stress-testing...

In the presence of macroeconomic shocks severe enough to threaten the liquidity or solvency of the banking system, the regulator can rely on the funds concentration effect to save long-term investment projects. Some banks are forced into bankruptcy with the result that other banks obtain more...