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

Authors

  • Hien Nguyen California State University, Pomona

DOI:

https://doi.org/10.18533/job.v7i03.271

Keywords:

Stress Test, Liquidity Risk, Banking, Financial Markets

Abstract

While existing papers in the related literature have paid attention to the effects of bank stress tests on banks’ exposure to credit risk and bank capital ratios, this paper investigates the effects of the Dodd-Frank Act Stress Test (DFAST) on bank equity risk. The effect of the stress test on banks’ liquidity risk management is also considered with the main focus on core deposits and liquid assets since they act as buffers 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 helps reduce bank equity risk and increases the amount of core deposits held at stress-tested banks. The paper concludes that the stress test indeed has a positive impact on banks’ risk exposure and risk management.

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Published

2022-11-07