Board of Governors of the Federal Reserve System

Appendix A: Model Changes for the 2023 Stress Test

Each year, the Federal Reserve refines both the substance and process of the 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 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 2023 stress test, the Federal Reserve made four notable updates to the supervisory models:¹¹⁵

• The international other consumer, international small-business, international first mortgage, and international home equity portfolios, which are components of the other retail loans model, will be assigned loss rates associated with a percentile of the historical loss distribution. Under the supervisory severely adverse scenario, this percentile is related to the frequency of severe recessions.
• The commercial real estate loss given default (LGD) model was updated to make it more risk sensitive to loan-specific variation in the collateral value of a firm's outstanding commitments. The updated model directly recognizes the impact of granular differences in collateral value on recoveries for defaulted loans.
• The pre-provision net revenue (PPNR) model was updated to capture trading revenues based on FR Y-9C and FR Y-14 data. In prior exercises, trading revenues for these firms were modeled in the aggregate and allocated to each firm based on its market share.
• Intermediate holding companies (IHCs), which became subject to the stress test in 2018, now have sufficient PPNR data history to be modeled individually and will no longer be modeled based on industry aggregate performance.¹¹⁶

In addition, in recent cycles, an adjustment was made to the Trading model for affordable housing public welfare investments. Due to recent revisions to the data collected on the FR Y-14Q report, this adjustment is no longer necessary.

 

References

 

 115. Other than the revisions to the other retail loans model, the results for the 2023 stress test for the other revisions listed in this section will reflect the average output from the 2022 and 2023 models, in accordance with the stress test policy on averaging material model changes. Return to text

 116. See page 76 of the 2018 stress test results for a description of the industry model: Dodd-Frank Act Stress Test 2018: Supervisory Stress Test Methodology and Results (Washington, Board of Governors, June 2018), https://www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf. Return to text