Does the Dodd-Frank Act Stress Test Improve Bank Equity Risk and Liquidity Risk?


  • Hien Nguyen California State University, Pomona



Stress Test, Liquidity Risk, Banking, Financial Markets


This paper attempts to fill the gap in the existing literature on stress tests by investigating the effects of the Dodd-Frank Act Stress Tests (DFAST) on bank equity risk and core deposits. The former signals future cash flows while the latter acts as a buffer for banks when market liquidity becomes scarce. Using a difference in difference model for the period 2013-2018, I find that the implementation of the DFAST reduces bank equity risk and increases the amount of core deposits held at the stress-tested banks. The findings show that the stress tests fulfill their primary goal of improving banks’ risk exposure and liquidity management, thereby promoting sound financial conditions in the banking industry.   


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