Implementing Dodd-Frank Act Stress Testing
DePaul Business and Commercial Law Journal, Vol. 14, No. 3, pp. 323-356, 2016
36 Pages Posted: 22 Mar 2016 Last revised: 12 Mar 2017
Date Written: March 21, 2016
In recent years, the question of how to prevent another crippling re-cession has become a prominent one. The answer provided by the Dodd-Frank Act is stress testing, which examines through economic models how banks would react to a bad turn of economic events, such as negative interest rates. The first of its kind in the legal literature, this Article offers a model for stress testing that banks should use in complying with Dodd-Frank. Specifically, this Article finds that the Bayesian model that takes into account past outcomes, namely the Federal Reserve’s previous stress test scenarios, is the most accurate model in stress testing.
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