Runs Versus Lemons: Why US Bank Stress Tests Succeeded While Europe’s Failed

By Thomas Philippon, Miguel Faria-e-Castro and Joseba Martinez

Thomas Philippon

Economic theory provides powerful arguments in favor of information disclosure.

At the height of the financial crisis, in February 2009, US authorities announced an innovative policy designed to restore confidence in the financial system: the Supervisory Capital Assessment Program, better known as the stress test.

Taking their supervisory duties an unprecedented step further, regulators would reveal to the public detailed bank-by-bank results of a thorough inspection of balance sheets – outing weak banks as such and endorsing the strength of sound ones.

With this information, it was hoped, investors would regain their willingness to invest in US financial institutions. And so it proved.

Read full article as published in The Conversation

Thomas Philippon is a Professor of Finance.