Model Secrecy and Stress Tests

Should regulators reveal the models they use to stress-test banks? In our setting, revealing leads gaming, but secrecy can induce banks underinvest in socially desirable assets for fear of failing test. We show that although regulator solve this underinvestment problem by making test easier, some disclosure may still be optimal (e.g., if have high appetite risk or capital shortfalls are not very costly). Cutoff rules within monotone rules, more generally is single-peaked. discuss policy implications and offer applications beyond stress tests.