Are the Dodd-Frank stress tests running out of steam?

11 July 2017/No Comments
By Nick Dunbar

In the nine quarters between September 2007 and December 2009, Citigroup reported pre-tax losses of $77 billion, burning through its Tier 1 capital and requiring a US government bailout. This is the historical narrative behind the format of the Dodd-Frank Act Stress Tests (DFAST). Every year, the big American banks are required to model the impact of a 2007-9 scenario on their balance sheets, over a nine-quarter time horizon. The Federal Reserve tweaks the scenarios every year but the result is the same: the banks’ capital ratios dip down towards the regulatory minimum, and as long as they don’t go too close to it, the Fed gives them a pass grade.

         

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