Dodd-Frank Tests Show BofA Can Survive Prolonged Stress
Bank of America (NYSE:BAC) is not so cautious that it could not survive another period of severe and prolonged market stress as it experienced between June 30, 2008 and December 31, 2008 — the worst of the financial crisis. In the five years that have passed since the crisis, America’s largest financial institutions have been under intense legal and regulatory scrutiny. Politicians and regulators searched for a means to repair the structural problems within the United States and the international banking system in order to insure that a similar financial meltdown would never happen again.
Of course, legislation was at the forefront of those efforts. While its effectiveness has been debated, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, brought the most significant changes to financial regulation in the United States since the reforms that took place following the Great Depression. Chief among its provisions — alongside the so-called “Volcker rule,” which was intended to reduce banks’ ability to take excessive risks — are stress tests.
To assess the health of these companies that brought the American economy to its knees, Congress mandated that banks be subjected to annual tests to uncover any “risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected financial institutions.”