Federal Reserve System (Fed) Dodd-Frank Act Stress Tests (DFAST) Results

Country:
United States
USD, US dollar
Sector:
Money

Fed Dodd-Frank Act Stress Tests (DFAST) Results are available as a report on stress tests of the largest US banks (having assets of $50 billion and more). The tests simulate adverse economic scenarios to check the banks' financial reliability.

Stress tests are focused on credit, market and liquidity risks. Credit risk means a possible increase in the number of non-refundable loans (i.e. risk of loss arising when a borrower fails to meet financial obligations and the lender loses the principal amount of the loan and the interest rate amount). Market risks are caused by a sharp worsening of a country's economic conditions. Liquidity risks are associated with a decline in the commodity value of investments and the inability to liquidate such investments without experiencing reputational damage or losses.

Stress tests simulate the bank activity in case of a sharp increase in unemployment, slow-down of economic growth, force majeure events in or outside the United States, etc. For example, one of the Fed's stress tests offered a hypothetical situation with a 21% fall in the cost of housing, a 50% fall in asset values, a 5% decrease in the national GDP and a 13% increase of unemployment.

The Dodd-Frank federal law was passed in 2010 after the global financial crisis. Under this law, the largest banks should conduct independent tests to check their financial reliability (and report test results to the Fed) every six months as well as pass the Fed's stress tests once a year. Thus, the regulator monitors the stability of the national financial system and tries to reduce risks.

If most banks report on the tests positively, this should be seen as positive for the US dollar, since it characterizes the country's economic system positively.