Accessible Version
Testing Bank Resiliency Through Time, Accessible Data
Figure 1. Unemployment and DOW Jones Stock Index by Scenario
Figure 1 includes two line graphs. The line graph on the left shows the unemployment rate, and the line graph on the right shows the DOW Jones Stock Index, under numerous macroeconomic stress scenarios. Those scenarios include the asset price shock, loan loss shock, and Moody’s scenario, and the min and max across 60 bank-submitted scenarios. The Moody’s scenario has a higher unemployment rate than the other scenarios for the forecast period. The loan loss shock has a larger decline in the DOW Jones Stock Index relative to the other scenarios we tested during the forecast period.
Notes: This figure includes the minimum and maximum values of the unemployment rate and DOW Jones Stock Index from 60 bank-submitted scenarios between 2016 and 2019, the Asset Price Shock, the Loan Loss Shock, and the Moody's scenario as of 2019:Q4, adjusted to a common base period and forecast horizon.
Source: Federal Reserve Board, Form FR Y-14A; Moody's Analytics, Inc., U.S. Macro Forecast Database.
Figure 2. Different Ways to Update Scenarios
Figure 2 includes two line graphs showing the historical unemployment rate and projected unemployment rate under numerous scenarios, as applied in the resiliency exercise [left graph] and as applied in the Board’s annual stress tests [right graph]. The historical series sample period is 2012:Q1 – 2019:Q4. Each graph includes the projected 9-quarter path of unemployment, jumping off from the fourth quarter of each year from 2016 – 2019. The left graph shows an increase of 7 percentage points within 3 quarters of each jump-off. As the historical unemployment rate declines, the projected unemployment rate in the resiliency exercise declines. The graph on the right shows the path of the unemployment rate from the Board’s severely adverse scenarios from its annual exercises during 2017 – 2020. The change in the unemployment rate used in annual stress test scenarios increased from 2017 through 2019 so that the unemployment rate in the scenario continued to reach 10 percent even as the actual unemployment rate decreased.
Notes: The left panel includes the Moody's scenario as of 2019:Q4, with forecasts beginning during the first quarter of 2017 – 2020 as applied in the resiliency exercise. The right panel of the figure includes Supervisory Severely Adverse scenarios from the 2017 to 2020 annual stress testing exercises.
Source: Federal Reserve Board, Annual stress test scenarios (https://www.federalreserve.gov/supervisionreg/dfa-stress-tests.htm); Moody's Analytics, Inc., U.S. Macro Forecast Database.
Figure 3. Methods to Move Variables Across Scenario Jump-offs
Figure 3 includes two line graphs. The line graph on the left shows the projected path of the 3-Month Treasury rate in the resiliency exercise, jumping off from 2014:Q1 and 2019:Q4. The jump-off value is above 1.5 percent in 2014:Q1 and near zero during 2019:Q4. Projected 3-month Treasury rates remain near zero after both jump-offs. The graph on the right shows the DOW Jones Index as applied in the resiliency exercise. The index decreases about 40 percent from its jump-off level and stays there.
Notes: This figure shows the paths of GDP growth and the DOW Jones Index, with forecasts beginning in 2014:Q2 and 2020:Q1, adjusted to a common forecast horizon. These methods help form a consistent shock through time in FLARE.
Source: Moody's Analytics, Inc., U.S. Macro Forecast Database.
Figure 4. Distribution of Quarterly PPNR
Figure 4 shows the distribution of minimum quarterly PPNR as estimated by FLARE across bank holding companies from 2014:Q1 – 2021:Q3. The distribution is shown using the asset price shock, loan loss shock, and Moody’s scenarios. The distribution for the Moody’s scenario has more weight in the left tail, showing smaller PPNR projections.
Notes: This figure shows minimum quarterly PPNR projections as a fraction of RWA using FLARE from 2014:Q1 – 2021:Q3 and estimates from FLARE using the Moody's scenario and two severe scenarios submitted by banks as part of prior annual stress test exercises (Asset Price and Loan Loss Shock).
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Bank Holding Companies; Federal Reserve Board, Form FR Y-14A, Federal Reserve Board, Large Bank Capital requirements (https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm); Moody's Analytics, Inc., U.S. Macro Forecast Database; FLARE calculations.
Figure 5. Distribution of Quarterly Net Charge-Offs
Figure 5 shows the distribution of maximum quarterly NCOs as estimated by FLARE across bank holding companies from 2014:Q1 – 2021:Q3. The distribution is shown using the asset price shock, loan loss shock, and Moody’s scenarios. The distribution for the loan loss shock has more weight in the right tail, showing larger NCO projections.
Notes: This figure shows maximum quarterly NCOs projections as a fraction of RWA using FLARE from 2014:Q1 – 2021:Q3 using the Moody's scenario and two severe scenarios submitted by banks as part of prior annual stress test exercises (Asset Price and Loan Loss Shock).
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Bank Holding Companies; Federal Reserve Board, Form FR Y-14A, Federal Reserve Board, Large Bank Capital requirements (https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm); Moody's Analytics, Inc., U.S. Macro Forecast Database; FLARE calculations.
Figure 6. Pre- and Post-Stress Aggregate CET1 Ratios
Figure 6 is a line graph showing historical common equity tier 1 (CET1) ratio and 2021 CET1 requirements weighted by RWA, in aggregate, for bank holding companies and the CET1 ratio for bank holding companies as projected by FLARE using the asset price shock, loan loss shock, and Moody’s scenario from 2014:Q1 – 2021:Q3. The CET1 ratios using the loan loss shock are generally below the projection using the other scenarios. The aggregate CET1 ratio minimum stays above 2021 weighted requirements in most quarters.
Notes: This figure includes estimates from FLARE using the Moody's scenario and two severe scenarios submitted by banks as part of prior annual stress test exercises (Asset Price and Loan Loss Shock). CET1 ratios are computed as average of all banks in our sample weighted by risk-weighted assets. Capital losses include PPNR and credit losses; losses due to operational risk and the global market shock are excluded as they are not modelled by FLARE. 2021 CET1 capital requirements include the regulatory minimum of 4.5 percent plus 2021 stress capital buffers and GSIB surcharges, weighted by RWA. We assume a 7.0 CET1 requirement for banks that are not subject to the annual stress test exercise.
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Bank Holding Companies; Federal Reserve Board, Form FR Y-14A, Federal Reserve Board, Large Bank Capital requirements (https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm); Moody's Analytics, Inc., U.S. Macro Forecast Database; FLARE calculations.
Figure 7. Capital Buffer Shortfall by Scenario
Figure 7 is a line graph showing the potential capital buffer shortfall, or the amount of CET1 capital banks would need to meet total 2021 CET1 capital requirements in the asset price shock, loan loss shock and Moody’s scenario from 2014:Q1 – 2021:Q3. The capital buffer shortfall is generally lowest in the asset price shock and highest in the loan loss shock scenario. The capital buffer shortfall peaked above $100 billion in the loan loss scenario during the first half of 2020 but stood at less than $50 billion during 2021:Q3.
Notes: This figure includes estimates from FLARE using the Moody's scenario and two severe scenarios submitted by banks as part of prior annual stress test exercises (Asset Price and Loan Loss Shock). The capital buffer shortfall is the amount of CET1 capital that would be required to bring all banks to total 2021 CET1 capital ratio requirements. Capital losses include PPNR and credit losses; losses due to operational risk and the global market shock are excluded as they are not modelled by FLARE. 2021 CET1 capital requirements include the regulatory minimum of 4.5 percent plus 2021 stress capital buffers and GSIB surcharges, weighted by RWA. We assume a 7.0 CET1 requirement for banks that are not subject to the annual stress test exercise.
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Bank Holding Companies; Federal Reserve Board, Form FR Y-14A, Federal Reserve Board, Large Bank Capital requirements (https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm); Moody's Analytics, Inc., U.S. Macro Forecast Database; FLARE calculations.