We study the joint design of two prominent micro-prudential policy tools: bank
regulation that enforces operational standards via rules, and market discipline through
information disclosure. Disclosure can be state-contingent but creates a trade-off between
incentives and the ex-post protection of weak banks. Hence, regulators use rules
to maintain incentives and imperfect disclosure to provide ex-post insurance. In the
optimal design, there is precautionary regulation to lower the risk of market freezes,
and more disclosure in bad times to restore trade. Systemically important banks face
more regulation but less disclosure. Banks prefer more disclosure but less regulation.
delegation technology adoption manipulation Bank Regulation; Stress Test; Disclosure; Information Design; Moral Hazard; Banking Crises