Bio: Carlos Corona is an Associate Professor of Accounting at Tepper School of Business. Carlos Corona received his PhD degree in Business Administration (Accounting) from Stanford University. His research interests are accounting theory and information economics. His research articles have been published in Journal of Accounting and Economics, The Accounting Review, and Review of Financial Studies, among others. His latest research focuses on the effects of dynamic reputational incentives on accounting decisions, and on the interaction between accounting standards and banking regulation. He has taught numerous undergraduate and graduate-level classes in financial and managerial accounting, and in corporate governance. Carlos Corona is an awarded teacher and has been selected three times as a finalist for the George Leland Bach Teaching Award (2012, 2017, and 2018). When Carlos isn’t teaching or absorbed in his research, he spends time with his wife and two furbabies and trying very hard not to be the worst gardener in his neighborhood. 

Abstract: We examine whether stress tests distort banks’ risk-taking decisions. We study a model in which a regulator may choose to rescue banks in the event of concurrent bank failures. Our analysis reveals a novel coordination role of stress tests. Disclosure of stress-test results informs banks of the failure likelihood of other banks, which facilitates banks’ coordination in risk-taking. However, conducting stress tests also enables the regulator to more effectively intervene banks, coordinating them preemptively into taking lower risks. We find that, if the social cost of bank failures is very large compared with the social cost of a bailout, stress tests improve welfare, whereas if the cost of bank failures is relatively low, stress tests impair welfare.