Cato Video •

Math Gone Mad: Systemic Dangers of the Federal Reserve’s Stress Tests

View the full event here: https://​www​.cato​.org/​e​v​e​n​t​s​/​m​a​t​h​-​g​o​n​e​-​m​a​d​-​s​y​s​t​e​m​i​c​-​d​a​n​g​e​r​s​-​f​e​d​e​r​a​l​-​r​e​s​e​r​v​e​s​-​s​t​r​e​s​s​-​tests

The Federal Reserve’s “stress tests” were intended to make the financial system safer. But with the Fed relying on risk modeling to determine regulatory capital requirements for banks, what happens if the models are wrong? Risk models can suffer from major weaknesses, ranging from poor assumptions to inadequate data, and can be particularly blind to tail‐​end risks—for example, the subprime crisis. Kevin Dowd discusses the consequences of stress tests.