A New Model for Bank Stress Tests

In recent years, policymakers have struggled with the question of how to prevent bank failures.  The Dodd-Frank Act offers one answer, calling for stress tests that examine through economic models how banks of a certain size would react to a bad turn of economic events, such as negative interest rates.  The 2016 stress tests, for example, required banks to consider their preparedness for negative U.S. short-term Treasury rates and major losses to their corporate and commercial real estate lending portfolios.[1]  A failed stress test raises red flags about whether a bank has enough capital to stay solvent in a … Read more