Board of Governors of the Federal Reserve System

Supervisory Scenarios for the Resubmission of Capital Plans in the Fourth Quarter of 2020

Introduction

The Federal Reserve Board conducts supervisory stress tests to help ensure that large banks operating in the United States will be able to lend to households and businesses even in a severe recession. The stress tests evaluate the resilience of large banks by estimating losses under hypothetical recession scenarios.

Earlier this year, the Federal Reserve Board released the results of its 2020 stress tests and an additional sensitivity analysis conducted to explore vulnerabilities of banks to the coronavirus outbreak and response, referred to as the "COVID-19 event." While that analysis indicated that all large banks were sufficiently capitalized, the Board took actions to preserve capital at banks in light of the heightened uncertainty associated with the event. Among those actions, the Board required banks to re-assess their capital needs and resubmit their capital plans. The Board further stated that it would conduct additional stress analyses later in the year to consider incoming data from banks and evolving economic conditions.

This publication describes three supervisory scenarios—baseline, severely adverse, and alternative severe—that the Board will use to conduct its updated stress analyses and that each firm must use to estimate projected revenues, losses, reserves, and pro forma capital levels as part of its 2020 capital plan resubmission.¹ In light of the substantial uncertainty around the likely course of economic activity, the severely adverse and alternative severe scenarios serve to capture a broad set of severe but plausible risks. This publication also details additional components—the global market shock component and the counterparty default component—that the largest and most complex firms must incorporate into the supervisory scenarios.

Supervisory Scenarios

The severely adverse and alternative severe scenarios describe a hypothetical set of conditions designed to assess the strength and resilience of banking organizations to an adverse economic environment. The baseline scenario follows a profile similar to average projections from a survey of economic forecasters. These scenarios are not Federal Reserve forecasts.²

The scenarios start in the third quarter of 2020 and extend through the third quarter of 2023. Each scenario includes 28 variables; this set of variables is the same as the set provided in the February 2020 supervisory scenarios. The variables describing economic developments within the United States include:

• Six measures of economic activity and prices: percent changes (at an annual rate) in real and nominal gross domestic product (GDP), the unemployment rate of the civilian non-institutional population aged 16 years and over, percent changes (at an annual rate) in real and nominal disposable personal income, and the percent change (at an annual rate) in the Consumer Price Index (CPI);
• Four aggregate measures of asset prices or financial conditions: indexes of house prices, commercial real estate prices, equity prices, and U.S. stock market volatility; and,
• Six measures of interest rates: the rate on 3-month Treasury bills; the yield for 5-year Treasury notes; the yield for 10-year Treasury notes; the yield for 10-year BBB corporate securities; the interest rate associated with conforming, conventional, 30-year fixed-rate mortgages; and the prime rate.

The variables describing international economic conditions in each scenario include three variables in four countries or country blocs and are the same as the set provided in the February 2020 supervisory scenarios:

• The three variables for each country or country bloc: the percent change (at an annual rate) in real GDP, the percent change (at an annual rate) in the CPI or local equivalent, and the level of the U.S. dollar exchange rate.
• The four countries or country blocs include: the euro area (the 19 European Union member states that have adopted the euro as their common currency); the United Kingdom; developing Asia (the nominal GDP-weighted aggregate of China, India, South Korea, Hong Kong Special Administrative Region, and Taiwan, all expressed in U.S. dollars); and Japan.

Baseline, Severely Adverse, and Alternative Severe Scenarios

The following sections describe the baseline, severely adverse, and alternative severe scenarios. The variables included in these scenarios are provided in tables at the end of this document. They can also be downloaded (together with the historical time series of the variables) from the Board's website, at https://www.federalreserve.gov/supervisionreg/dfa-stress-tests.htm. Historical data for the domestic and the international variables are reported in Table 1.A and Table 1.B, respectively.

Baseline Scenario

The baseline outlook for U.S. real activity, inflation, and interest rates (see Table 2.A) is similar to the September 2020 consensus projections from Blue Chip Economic Indicatorsand to projections from other professional forecasters.³ This scenario is not a Federal Reserve forecast.

The baseline scenario for the United States is a sharp increase in economic activity in the second half of 2020, followed by continued but more moderate improvement in economic conditions over the remainder of the 13-quarter stress test period. Real GDP growth rises sharply at an annualized rate of 14 percent in the second half of 2020, then gradually declines to about 2-1/2 percent in 2023. The unemployment rate declines throughout the scenario period, falling to almost 8-3/4 percent by the end of 2020 and to about 5-1/4 percent in the third quarter of 2023, the end of the scenario period. Annualized quarterly headline CPI inflation is 3-3/4 percent in the third quarter of 2020 but drops thereafter and is relatively steady over the rest of the scenario period, ranging from 2 to 2-1/4 percent.

Accompanying the economic recovery, short-term Treasury rates are assumed to remain near zero through the end of 2021, and then to gradually rise to slightly above 1 percent by the end of the stress test period. Longer-dated Treasury yields are assumed to rise slightly over the scenario period, consistent with some steepening of the yield curve. Yields on 10-year Treasury securities rise from about 3/4 percent in late 2020 to about 2 percent by the end of the scenario period. The prime rate moves in line with short-term Treasury rates, while corporate bond yields rise in line with long-term Treasury yields. Mortgage rates fall to 2-3/4 percent at the end of 2020, remain near that level through 2021, and then rise gradually and in line with long-term Treasury yields, reaching 3-1/2 percent at the end of the scenario period.

Equity prices rise 3/4 percent from the third to the fourth quarter of 2020 and about 3-1/2 percent per year in 2021 and 2022. Equity prices are up more than 10-3/4 percent by the end of the scenario period. Equity market volatility, as measured by the VIX, averages 31-1/4 in the second half of 2020 and then remains near 26 for the remainder of the scenario period. House prices rise at an annualized rate of about 3-1/2 percent from the third to the fourth quarter of 2020; thereafter, house price appreciation gradually increases to an annualized rate of 4 percent for the last three quarters of the scenario period. Commercial real estate prices decline 10 percent through the third quarter of 2021 and then rise 7-3/4 percent through the end of the scenario period.

The baseline paths for the international variables (see Table 2.B) are similar to the trajectories reported in the September 2020 Blue Chip Economic Indicators. After strong growth in the third quarter of 2020, the baseline scenario features a relatively steady expansion in international economic activity, albeit at a different pace across the four country blocs: Over the entire scenario period, annualized real GDP growth averages 6 percent in developing Asia, 6-3/4 percent in the euro area, 4 percent in Japan, and 10-1/2 percent in the United Kingdom.

Severely Adverse Scenario

The severely adverse scenario follows the Board's Policy Statement on the Scenario Design Framework for Stress Testing ("Scenario Design Framework") and is characterized by a severe decline in global economic activity accompanied by financial market distress.⁴ This hypothetical scenario is designed to assess the strength and resilience of banking organizations to unfavorable economic conditions, and is not a Federal Reserve forecast.

Consistent with the Scenario Design Framework, under the severely adverse scenario, the U.S. unemployment rate climbs to a peak of 12-1/2 percent in the fourth quarter of 2021 (see Table 3.A), a 3 percentage point increase relative to the initial level, the level in the third quarter of 2020.⁵ In line with the increase in the unemployment rate, real GDP falls 3-1/4 percent from the third quarter of 2020 to its trough in the fourth quarter of 2021. The decline in activity is accompanied by a lower headline CPI inflation rate, which quickly falls to an annual rate of about 1-1/4 percent in the fourth quarter of 2020, and then ranges from 1-1/4 percent to about 2-1/4 percent in the remaining quarters.

In the later quarters of the scenario, the unemployment rate declines at a pace comparable with the paths of severely adverse scenarios used in previous stress testing cycles. Over the scenario period, despite the reduction in the unemployment rate, the level of real GDP does not rise above the level in the baseline scenario.

In line with the severe decline in real activity, the interest rate for 3-month Treasury bills remains near zero throughout the scenario period. The 10-year Treasury yield rises gradually from about 1/4 percent during the fourth quarter of 2020 to about 1-1/2 percent by the end of the scenario period. The result is a steepening of the yield curve over the scenario period.

Financial conditions in corporate and real estate lending markets are stressed significantly. The spread between yields on investment-grade corporate bonds and yields on long-term Treasury securities widens to almost 5-3/4 percentage points before narrowing to about 1-3/4 percentage points at the end of the scenario period. The spread between mortgage rates and 10-year Treasury yields widens to about 3-1/2 percentage points early in 2021 before gradually falling to about 1-3/4 percentage points by the end of the scenario.

Asset prices drop sharply in this scenario. Equity prices decline more than 30 percent from the third to the fourth quarter of 2020, as the economy contracts sharply, and the VIX rises to a peak level of 70. Equity prices continue to fall in the first half of 2021 before gradually recovering, leaving them down about 23 percent for the year. They continue to recover but close the scenario period down about 4-3/4 percent from their value in the initial quarter. House prices and commercial real estate prices also experience large declines. House prices fall about 26-3/4 percent from the third quarter of 2020 to the third quarter of 2022; from that trough, they rise about 4-1/2 percent during the rest of the scenario period. Commercial real estate prices decline 30 percent from the third quarter of 2020 to the fourth quarter of 2022 and stay close to that level for the remainder of the scenario period.

The international component of this scenario features sharp slowdowns in all developed country blocs, leading to recessions in the euro area, the United Kingdom, and Japan. Developing Asia has only a mild slowdown in economic activity in the scenario. With the continued weakness in economic activity, all of the foreign economies included in the scenario experience sizable declines in their inflation rates during the scenario period. The U.S. dollar appreciates against the euro, the pound sterling, and the currencies of developing Asia, but depreciates slightly against the yen, reflecting flight-to-safety capital flows.

Additional Key Features of the Severely Adverse Scenario

Stresses in the corporate loan market should be assumed to be more intense for lower-rated firms. Declines in aggregate U.S. residential and commercial real estate prices should be assumed to be concentrated in regions that have experienced rapid price gains over the past two years. Declines in prices of U.S. housing and commercial real estate should also be assumed to be representative of risks to house prices and commercial real estate prices in foreign regions and economies that have experienced rapid price gains over the past two years. Moreover, conditions across Latin American economies should be assumed to be comparable to the sharp slowdown in the United States.

Comparison of the Current Severely Adverse Scenario and the February 2020 Severely Adverse Scenario

The severely adverse scenario features a smaller increase in the unemployment rate in the United States compared with the February 2020 severely adverse scenario. However, the current severely adverse scenario starts from a significantly higher unemployment rate, reflecting current economic conditions. The smaller increase in the unemployment rate reflects the Scenario Design Framework, which calls for a smaller increase in the unemployment rate when the unemployment rate is already elevated.

The consensus forecast from Blue Chip Economic Indicators has an unemployment rate of 9-1/2 percent in the third quarter of 2020. Given the weak initial economic conditions, the Scenario Design Framework calls for a 3 percentage point increase in the unemployment rate. Accordingly, the unemployment rate in the current scenario reaches a peak of 12-1/2 percent. Interest rates rise in the current scenario, given their low starting values, whereas they fell in the February 2020 scenario. Asset price declines are comparable with the declines in the February scenario.

Alternative Severe Scenario

This alternative scenario is consistent with a number of adverse events, including a series of second waves of the COVID-19 event that are not synchronized across different regions of the United States and the rest of the world, and related structural changes in labor markets. Accordingly, the alternative severe scenario is characterized by a less-severe initial drop in global economic activity relative to the severely adverse scenario, and a subsequent recovery that is more sluggish. Financial market stress is comparable with the stress assumed in the severely adverse scenario. The alternative severe scenario is designed to assess the strength and resilience of banking organizations to an alternative set of unfavorable economic conditions and is not a Federal Reserve forecast.

Under the alternative severe scenario, the U.S. unemployment rate climbs to a peak of about 11 percent in the fourth quarter of 2020 (see Table 4.A). This 1-1/2 percentage point increase in the unemployment rate departs from the Scenario Design Framework, which would call for the unemployment rate to rise at least 3 percentage points and to peak between the sixth and the eighth quarter of the scenario. The unemployment rate stays at its 11 percent peak through the fourth quarter of 2021. By that quarter, the unemployment rate is about 4-1/2 percentage points higher than in the baseline scenario, but 1-1/2 percentage points lower than in the severely adverse scenario. However, by the end of the scenario period, the relationship with the severely adverse scenario is reversed: The unemployment rate in the alternative severe scenario is 9 percent in the third quarter of 2023, about 1-1/2 percentage points higher than in the severely adverse scenario.

In line with the increase in the unemployment rate, real GDP falls at an annualized rate of 9 percent in the fourth quarter of 2020 and then rises about 2 percent in 2021. Real GDP growth picks up over the remainder of the scenario period. The decline in activity is accompanied by a lower headline CPI inflation rate, which quickly falls to an annual rate of about 1 percent in the fourth quarter of 2020, and then is relatively steady over the rest of the 13-quarter period, ranging from 1-3/4 to 2-1/4 percent.

In line with the prolonged weakness in real activity, the interest rate for 3-month Treasury bills remains near zero throughout the scenario, which is identical to the path assumed in the severely adverse scenario. The 10-year Treasury yield rises gradually from 1/4 percent during the third quarter of 2020 to 1-3/4 percent by the end of the scenario period. The result is a slightly greater steepening of the yield curve over the scenario period than in the severely adverse scenario.

Financial conditions in corporate and real estate lending markets are stressed significantly. The spread between yields on investment-grade corporate bonds and yields on long-term Treasury securities widens gradually to about 5-3/4 percentage points in the third quarter of 2021, before falling to 2-3/4 percentage points at the end of the scenario period, an increase of 1 percentage point relative to the third quarter of 2020 and 3/4 percentage point higher than assumed in the severely adverse scenario. The spread between mortgage rates and 10-year Treasury yields widens to about 3-1/4 percentage points in the fourth quarter of 2020; it remains near this level through the fourth quarter of 2021 before gradually declining, and reaches 2 percentage points at the end of the scenario period. This end point is 1/4 percentage point higher than in the severely adverse scenario, reflecting the persistently weaker level of activity assumed in this alternative scenario.

Asset prices drop sharply in this scenario. Equity prices remain depressed longer than in the severely adverse scenario, bottoming out at the end, rather than the middle, of 2021. They fall about 16-1/4 percent from the third to the fourth quarter of 2020 as the economy contracts; this decline in equity prices is accompanied by a rise in the VIX, which reaches a peak of 70. Equity prices continue to fall through 2021, and at the end of 2021 are almost 50 percent lower than in the third quarter of 2020. They recover through the rest of the scenario period and end the scenario down about 13-1/2 percent from the third quarter of 2020. The VIX gradually decreases to 28 by the end of the scenario period. House prices and commercial real estate prices also experience large overall declines. House prices fall 27 percent through the fourth quarter of 2022 and recover 3-3/4 percent through the rest of the scenario period, a path of house prices similar to the path in the severely adverse scenario. Commercial real estate prices decline 30 percent through the end of 2022 and stay close to that level for the remainder of the scenario, a path that matches the one in the severely adverse scenario.

In line with domestic developments, the international component of this scenario features a less-severe initial contraction in global economic activity than in the severely adverse scenario, but a less-robust recovery thereafter. With the continued weakness in economic activity, all of the foreign economies included in the scenario experience sizable declines in their inflation rates during the scenario period. As in the severely adverse scenario, the U.S. dollar initially appreciates against the euro, the pound sterling, and the currencies of developing Asia, but depreciates slightly against the yen, consistent with flight-to-safety capital flows.

Additional Key Features of the Alternative Severe Scenario

Stresses in the corporate loan market should be assumed to be more intense for lower-rated firms. Declines in aggregate U.S. residential and commercial real estate prices should be assumed to be concentrated in regions that have experienced rapid price gains over the past two years. Declines in prices of U.S. housing and commercial real estate should also be assumed to be representative of risks to house prices and commercial real estate prices in foreign regions and economies that have experienced rapid price gains over the past two years. Moreover, conditions across Latin American economies should be assumed to be comparable to the sharp slowdown in the United States.

Comparison of the Alternative Severe Scenario and the June 2020 Alternative Downside Scenarios

In June 2020 the Federal Reserve Board used several scenarios for additional sensitivity analysis to explore vulnerabilities of banks related to the COVID-19 event.⁶ The sources of stress considered in the alternative severe scenario are comparable to those for the W- and U-shaped scenarios for the sensitivity analysis released in June, albeit the rise in the unemployment rate envisaged in the new scenario is smaller but more persistent. These changes in the peak of the unemployment rate in the alternative severe scenario are in line with revisions to the forecasts of professional forecasters. Data released for the end of the second quarter and the first part of the third quarter of 2020 have generally led professional forecasters to revise downward the level of the unemployment rate expected to prevail during the remainder of 2020 and have significantly compressed the range of forecasts.

Comparison of the Alternative Severe Scenario and the February 2020 Severely Adverse Scenario

The February 2020 severely adverse scenario was designed and published before the onset of the COVID-19 event. The alternative severe scenario features a smaller increase in the unemployment rate in the United States compared with the February 2020 severely adverse scenario. However, the alternative severe scenario starts from a significantly higher unemployment rate, reflecting current economic conditions. The relatively smaller increase in the unemployment rate departs from the Scenario Design Framework, which would call for the unemployment rate to rise at least 3 percentage points and to peak between the sixth and the eighth quarter of the scenario. Moreover, the unemployment rate remains near its peak for a greater number of periods. On the financial side, asset price declines are broadly consistent with those in the February scenario.

Global Market Shock Component for the Supervisory Severely Adverse and Alternative Severe Scenarios

The global market shock is a set of hypothetical shocks to a large set of risk factors reflecting general market distress and heightened uncertainty. Firms with significant trading activity must consider the global market shock as part of the supervisory severely adverse and alternative severe scenarios, and recognize associated losses in the first quarter of the planning period.⁷ In addition, certain large and highly interconnected firms must apply the same global market shock when projecting losses under the counterparty default scenario component. The global market shock is applied to asset positions held by the firms on a given as-of date. The as-of date for the global market shock is June 30, 2020. These shocks do not represent a forecast of the Federal Reserve.

The design and specification of the global market shock differ from those for the macroeconomic scenarios for several reasons. First, profits and losses from trading and counterparty credit are measured in mark-to-market terms, while revenues and losses from traditional banking are generally measured using the accrual method. Another key difference is the timing of loss recognition: The global market shock affects the mark-to-market value of trading positions and counterparty credit losses in the first quarter of the projection horizon; this timing is based on an observation that market dislocations can happen rapidly and unpredictably under stress conditions. Applying the global market shock in the first quarter of the projection horizon ensures that potential losses from trading and counterparty exposures are incorporated into trading companies' capital ratios at all points over the projection period.

The global market shock component is specified by a large set of risk factors that include, but are not limited to:

• Equity prices of key developed markets and developing and emerging market nations to which trading companies may have exposure, along with selected points along term structures of implied volatilities;
• Foreign exchange rates of most major and some minor currencies, along with selected points along term structures of implied volatilities;
• Selected-maturity sovereign debt yields (e.g., Treasury yields), swap rates, and other key rates for key developed markets and for developing and emerging market nations to which trading companies may have exposure;
• Selected maturities and expiries of implied volatilities that are key inputs to the pricing of interest rate derivatives;
• Selected expiries of futures prices for energy products, including crude oil (differentiated by country of origin), natural gas, and power;
• Selected expiries of futures prices for metals and agricultural commodities; and
• Credit spreads or prices for selected credit-sensitive products, including corporate bonds, credit default swaps, and loans by risk; non-agency residential mortgage-backed securities and commercial mortgage-backed securities by risk and vintage; sovereign debt; and municipal bonds.

The Board considers emerging and ongoing areas of financial market vulnerability in the development of the global market shock. This assessment of potential vulnerabilities is informed by financial stability reports; supervisory information; and internal and external assessments of potential sources of distress such as geopolitical, economic, and financial-market events.

The global market shock includes a standardized set of risk-factor shocks to financial market variables that apply to all firms with significant trading activity. Depending on the type of financial market vulnerabilities that the global market shock assesses, the market shocks could be based on a single historical episode, multiple historical periods, hypothetical (but plausible) events that are based on salient risks, or a hybrid approach comprising some combination of historical episodes and hypothetical events. A market shock based on hypothetical events may result in changes in risk factors that were not previously observed.

Risk-factor shocks are calibrated based on assumed time horizons. The calibration horizons reflect a number of considerations related to the scenario being modeled. One important consideration is the liquidity characteristics of different risk factors, which vary based on the specified market shock narrative. More specifically, calibration horizons reflect the variation in the speed at which trading companies could reasonably close out, or effectively hedge, risk exposures in the event of market stress. The calibration horizons are generally longer than the typical time needed to liquidate assets under normal conditions because they are designed to capture the unpredictable liquidity conditions that prevail in times of stress, among other factors.⁸ For example, more-liquid asset classes, such as interest rates, foreign exchange, or public equities, are calibrated to shorter horizons, such as three months, while less-liquid assets, such as non-agency securitized products or private equities, have longer calibration horizons, such as 12 months.

Severely Adverse and Alternative Severe Scenarios

Both the severely adverse and alternative severe scenarios include the same global market shock component, which incorporates widespread corporate defaults, ratings downgrades, severe declines in equity values, and increases in equity-implied volatility resulting from a worsening recession.

Spreads widen sharply for non-investment grade and lower-rated investment grade bonds as ratings-sensitive investors anticipate further downgrades and sell assets. Similarly, the leveraged loan market comes under considerable pressure from decreased demand. Open-ended mutual funds and exchange-traded funds (ETFs) that hold leveraged loans and high-yield bonds face heavy redemptions. Due to liquidity mismatches, mutual fund and ETF managers sell their most-liquid holdings, leading to more extensive declines in the prices of fixed-income securities and other related assets. Price declines on leveraged loans flow through to the prices for collateralized loan obligations (CLOs). CLO prices suffer severe corrections associated with the devaluation of the underlying collateral and selling by concentrated holders desiring to reduce risk.

The broad selloff of corporate bonds and leveraged loans spills over to prices for other risky credit and private equity instruments. Credit spreads for emerging market corporate credit and sovereign bonds widen due to a fall in risk appetite and flight-to-safety considerations. Asset values for private equity experience sizable declines as leveraged firms face lower earnings and a weak economic outlook. Municipal bond spreads widen in line with lower municipal tax revenues associated with the severe weakening of the U.S. economy.

Given the current low level of short-term interest rates, short-term Treasury rates fall only slightly in this scenario. Longer-term Treasury rates fall as a result of flight-to-safety flows, but by a modest amount given the already-low interest rate environment. Short-term U.S. interbank lending rates rise as firms face increased funding pressure from a pullback in overnight lending, while longer-term swap rates fall in line with the declines in long-term Treasury rates.

Flight-to-safety considerations cause the U.S. dollar to appreciate somewhat against the currencies of most advanced economies, with the Japanese yen a notable exception. The yen appreciates against the U.S. dollar as investors view the yen as a safe-haven currency. Flight-to-safety considerations cause precious metals to experience an increase in value while non-precious metals prices fall as a result of lower demand that in turn results from global economic weakness.

Comparison of the Global Market Shock Components for the Current Severely Adverse and the Alternative Severe Scenarios and the February 2020 Severely Adverse Scenario

The global market shock component is broadly consistent with the February 2020 severely adverse scenario as both emphasize a heightened stress to highly leveraged markets that causes CLOs and private equity investments to experience large market value declines. Moreover, there is a general rise in short-term interbank lending rates, highlighting a severe increase in funding pressures. A key difference is a milder decline in Treasury rates, which reflects that policy rates are now closer to zero. Shocks to equity values and short-term equity implied volatility are substantially larger. Energy price declines and related volatility increases are more pronounced, in general. The Swiss franc depreciates instead of appreciates against the U.S. dollar. Finally, stresses in the municipal bond market are more severe.

Comparison of the Global Market Shock Components for the Current Severely Adverse and the Alternative Severe Scenarios and the June 2020 Alternative Downside Scenarios

The global market shock component reflects themes similar to those highlighted in the June 2020 alternative downside scenarios. Key differences include a milder decline in Treasury rates, which reflects that policy rates are now closer to zero. Sovereign credit spreads widen less severely, particularly in the European periphery. In addition, changes to agency option-adjusted spreads are more modest given the increase in spread levels since the as-of-date of the June 2020 alternative downside scenarios.

Counterparty Default Component for the Supervisory Severely Adverse and Alternative Severe Scenarios

Firms with substantial trading or custodial operations will be required to incorporate a counterparty default scenario component into their supervisory severely adverse and alternative severe stress scenarios for the resubmission of capital plans in the fourth quarter of 2020. The counterparty default scenario component involves the instantaneous and unexpected default of the firm's largest counterparty.^{9 ,10}

In connection with the counterparty default scenario component, these firms will be required to estimate and report the potential losses and related effects on capital associated with the instantaneous and unexpected default of the counterparty that would generate the largest losses across their derivatives and securities financing activities, including securities lending and repurchase or reverse repurchase agreement activities. The counterparty default scenario component is an add-on to the macroeconomic conditions and financial market environments specified in the supervisory severely adverse and alternative severe scenarios.

The largest counterparty of each firm will be determined by net stressed losses. Net stressed losses are estimated by applying the global market shock to revalue non-cash securities financing transactions (securities or collateral posted or received); and, for derivatives, the trade position and non-cash collateral exchanged. The as-of date for the counterparty default scenario component is June 30, 2020—the same date as for the global market shock.¹¹

Variables for the Supervisory Scenarios

Table 1.A. Historical data: Domestic variables, Q1:2000–Q2:2020

Table 1.B. Historical data: International variables, Q1:2000–Q2:2020

Table 2.A. Supervisory baseline scenario: Domestic variables, Q3:2020–Q3:2023

Table 2.B. Supervisory baseline scenario: International variables, Q3:2020–Q3:2023

Table 3.A. Supervisory severely adverse scenario: Domestic variables, Q3:2020–Q3:2023

Table 3.B. Supervisory severely adverse scenario: International variables, Q3:2020–Q3:2023

Table 4.A. Supervisory alternative severe scenario: Domestic variables, Q3:2020–Q3:2023

Table 4.B. Supervisory alternative severe scenario: International variables, Q3:2020–Q3:2023

Notes Regarding Scenario Variables

Sources for data through 2020:Q2 (as released through September 10, 2020). The 2020:Q2 values of variables marked with an asterisk (*) are projected.

U.S. real GDP growth: Percent change in real gross domestic product, chained 2012 dollars, expressed at an annualized rate, Bureau of Economic Analysis (NIPA table 1.1.6, line 1).

U.S. nominal GDP growth: Percent change in gross domestic product (current dollars), expressed at an annualized rate, Bureau of Economic Analysis (NIPA table 1.1.5, line 1).

U.S. real disposable income growth: Percent change in disposable personal income (current dollars) divided by the price index for personal consumption expenditures, expressed at an annualized rate, Bureau of Economic Analysis (NIPA table 2.1, line 27, and NIPA table 1.1.4, line 2).

U.S. nominal disposable income growth: Percent change in disposable personal income (current dollars), expressed at an annualized rate, Bureau of Economic Analysis (NIPA table 2.1, line 27).

U.S. unemployment rate: Quarterly average of seasonally adjusted monthly data for the unemployment rate of the civilian, non-institutional population of age 16 years and older, Bureau of Labor Statistics (series LNS14000000).

U.S. CPI inflation: Percent change in the quarterly average of seasonally adjusted monthly data for the all-items CPI for all urban consumers (CPI-U), expressed at an annualized rate, Bureau of Labor Statistics (series CUSR0000SA0).

U.S. 3-month Treasury rate: Quarterly average of 3-month Treasury bill secondary market rate on a discount basis, H.15 Release, Selected Interest Rates, Federal Reserve Board (series RIFSGFSM03_N.B).

U.S. 5-year Treasury yield: Quarterly average of the yield on 5-year U.S. Treasury notes, constructed for the FRB/U.S. model by Federal Reserve staff based on the Svensson smoothed term structure model; see Lars E. O. Svensson (1995), "Estimating Forward Interest Rates with the Extended Nelson-Siegel Method," Quarterly Review, no. 3, Sveriges Riksbank, pp. 13–26.

U.S. 10-year Treasury yield: Quarterly average of the yield on 10-year U.S. Treasury notes, constructed for the FRB/U.S. model by Federal Reserve staff based on the Svensson smoothed term structure model; see id.

U.S. BBB corporate yield: Quarterly average of ICE BofAML U.S. Corporate 7-10 Year Yield-to-Maturity Index, ICE Data Indices, LLC, used with permission (C4A4 series).

U.S. mortgage rate: Quarterly average of weekly series for the interest rate of a conventional, conforming, 30-year fixed-rate mortgage, obtained from the Primary Mortgage Market Survey of the Federal Home Loan Mortgage Corporation.

U.S. prime rate: Quarterly average of monthly series, H.15 Release (Selected Interest Rates), Federal Reserve Board (series RIFSPBLP_N.M).

U.S. Dow Jones Total Stock Market (Float Cap) Index: End-of-quarter value via Bloomberg Finance L.P.

* U.S. House Price Index: Price Index for Owner-Occupied Real Estate, Z.1 Release (Financial Accounts of the United States), Federal Reserve Board (series FL075035243.Q divided by 1000).

* U.S. Commercial Real Estate Price Index: Commercial Real Estate Price Index, Z.1 Release (Financial Accounts of the United States), Federal Reserve Board (series FL075035503.Q divided by 1000).

U.S. Market Volatility Index (VIX): VIX converted to quarterly frequency using the maximum close-of-day value in any quarter, Chicago Board Options Exchange via Bloomberg Finance LP.

Euro area real GDP growth: Percent change in real gross domestic product at an annualized rate, staff calculations based on Statistical Office of the European Communities via Haver, extended back using ECB Area Wide Model dataset (ECB Working Paper series no. 42).

Euro area inflation: Percent change in the quarterly average of the harmonized index of consumer prices at an annualized rate, staff calculations based on Statistical Office of the European Communities via Haver.

Developing Asia real GDP growth: Percent change in real gross domestic product at an annualized rate, staff calculations based on data from Bank of Korea via Haver; National Bureau of Statistics of China via Haver; Indian Central Statistics Office via Haver; Census and Statistics Department of Hong Kong via Haver; and Taiwan Directorate-General of Budget, Accounting and Statistics via Haver.

Developing Asia inflation: Percent change in the quarterly average of the consumer price index, or local equivalent, at an annualized rate, staff calculations based on data from National Bureau of Statistics of China via Haver; Indian Ministry of Statistics and Programme Implementation via Haver; Labour Bureau of India via Haver; Statistics Korea (KOSTAT) via Haver; Census and Statistics Department of Hong Kong via Haver; and Taiwan Directorate-General of Budget, Accounting and Statistics via Haver.

Japan real GDP growth: Percent change in gross domestic product at an annualized rate from 1980 to present and percent change in gross domestic expenditure at an annualized rate prior to 1980, Cabinet Office of Japan via Haver.

Japan inflation: Percent change in the quarterly average of the consumer price index at an annualized rate, based on data from the Ministry of Internal Affairs and Communications via Haver.

U.K. real GDP growth: Percent change in gross domestic product at an annualized rate, U.K. Office for National Statistics via Haver.

U.K. inflation: Percent change in the quarterly average of the consumer price index at an annualized rate from 1988 to present and percent change in the quarterly average of the retail prices index prior to 1988, staff calculations based on data from the U.K. Office for National Statistics via Haver.

Exchange rates: End-of-quarter exchange rates, H.10 Release (Foreign Exchange Rates), Federal Reserve Board.

Footnotes