Banks tend to game stress tests, Fed economists say
Models tend to be subject to “strategic adjustments”, paper finds
Banks that are asked to design their own stress-testing models have a tendency to game the results, research published by the US Federal Reserve warns.
The European Banking Authority and the Fed, for its Dodd-Frank stress tests, both ask banks to develop their own models, within certain methodological boundaries. Results are then used to evaluate banks’ capital needs.
Authors Friederike Niepmann and Viktors Stebunovs say banks have a tendency to “model their stress away”, making “strategic
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