Does the Dodd-Frank Act Stress Test Improve Bank Equity Risk and Liquidity Risk?
DOI:
https://doi.org/10.18533/job.v7i03.271Keywords:
Stress Test, Liquidity Risk, Banking, Financial MarketsAbstract
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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