Appendix A: Model Changes for the 2022 Supervisory Stress Test
Each year, the Federal Reserve refines both the substance and process of the supervisory stress test, including its development and enhancement of independent supervisory models. The supervisory stress test models may be enhanced to reflect advances in modeling techniques; enhancements in response to model validation findings; incorporation of richer and more detailed data; and identification of more stable models or models with improved performance, particularly under stressful economic conditions. Each year, the Federal Reserve also makes a number of relatively minor refinements, if necessary, to models that may include re-estimation with new data, re-specification based on performance testing, and other refinements to the code used to produce supervisory projections.
For the 2022 supervisory stress test, the Federal Reserve has updated the other retail loans model. The model was enhanced and simplified to directly model net charge-offs, improve sensitivity to scenarios, and improve model stability. The changes were material for the small-business and corporate credit card portfolio within the other retail loans category.116 Consistent with the Federal Reserve's stated policy for material model changes, the small-business and corporate credit card portfolio estimates for the 2022 supervisory stress test will be the average of the results produced by the model used in 2021 and the results produced under the updated model.117 The Federal Reserve will fully phase-in the model change for the small-business and corporate credit card portfolio for the 2023 supervisory stress test.
The Federal Reserve also made two less material enhancements for the 2022 supervisory stress test. The FVO/HFS retail loans model has been enhanced to incorporate measures of interest rate duration for residential mortgages to improve risk sensitivity of the model. The Federal Reserve will also separately project gains and losses for hedges on loans measured at amortized cost following recent updates to the FR Y-14Q regulatory reporting form.
References
116. Portfolios with material model changes are defined as those in which the change in revenue or losses exceeds 50 basis points for any firm individually under the severely adverse scenario, expressed as a percentage of risk-weighted assets (RWAs), based on data and scenarios from the 2021 supervisory stress test. In cases in which a portfolio contains more than one change, materiality is defined by the net change. Return to text
117. Starting with the 2017 supervisory stress test, the Federal Reserve began to adhere to a policy of phasing in the most material model enhancements over two stress test cycles to smooth the effect on post-stress capital ratios. See Stress Testing Policy Statement, 82 Fed. Reg. 59528 (Dec. 15, 2017). Return to text