Implementing Dodd-Frank Act Stress Testing

Abstract

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 com- plying with Dodd-Frank. Specifically, this Article finds that the Baye- sian model that takes into account past outcomes, namely the Federal Reserve's previous stress test scenarios, is the most accurate model in stress testing.