A New Model for Bank Stress Tests
Columbia Law School Blue Sky Blog, January 26, 2017
2 Pages Posted: 4 Jan 2019
Date Written: January 2017
This Columbia Law School Blue Sky Blog post advocates for the introduction of a Bayesian model that takes into account prior inputs in bank stress testing. Specifically, the priors would be the previous Federal Reserve adverse scenarios. Failure to consider these prior scenarios could underestimate by as much as 25 percent a bank’s loan losses in an adverse economic scenario. This could be the difference between passing and failing a stress test.
Keywords: stress testing, Dodd Frank, banks, regulation
JEL Classification: G10
Suggested Citation: Suggested Citation