Executive Summary
This document provides details about the models developed or selected by the Federal Reserve for use in the supervisory stress test with the aim of further increasing the transparency of supervisory models and results.
Since the inception of the supervisory stress test, the Board of Governors of the Federal Reserve System (Board) has gradually increased the breadth of its public disclosures, which allows the public to evaluate the fundamental soundness of the supervisory stress test and can increase public and market confidence in the results of the assessment. The Board has sought and received feedback regarding the transparency of the supervisory stress test from the public during routine reviews of its stress testing and capital planning programs.1 Most recently, the Board finalized a set of changes to improve the public's understanding of the models used in the supervisory stress test and of the Federal Reserve's modeling processes.2
Disclosing additional information about the Federal Reserve's supervisory modeling process, in particular, can further enhance the credibility of the test, as supervisory models are critical inputs into the estimation of post-stress capital in the supervisory stress test. Providing certain additional details on models can facilitate the public's understanding and interpretation of the results of the stress test. The publication of certain additional information on the models that assign losses to particular positions could also help financial institutions subject to the stress test understand the capital implications of changes to their business activities. This document is designed to improve the transparency around the supervisory models, while maintaining the efficacy of the supervisory stress test.3
This document is organized into the following sections: "Approach to Supervisory Model Development and Validation" provides an overview of the general approach to supervisory model development and validation in stress testing. "Overview of Modeling Framework" summarizes the supervisory modeling framework and methodology. "Descriptions of Supervisory Models" includes detailed descriptions of the supervisory stress test models. "Modeled Loss Rates" contains additional disclosures for certain material portfolios, including modeled loss rates on pools of loans and loss rates associated with portfolios of hypothetical loans. Finally, "Appendix A: Model Changes for DFAST 2019" describes a comprehensive list of supervisory model changes effective in DFAST 2019.
References
1. During a review that began in 2015, the Federal Reserve received feedback from senior management at firms subject to the Board's capital plan rule, debt and equity market analysts, representatives from public interest groups, and academics in the fields of economics and finance. That review also included an internal assessment. Return to text
2. See 84 Fed. Reg. 6651, 6664, 6784 (Feb. 28, 2019). Return to text
3. The Federal Reserve acknowledges that there are costs associated with full transparency of supervisory models. The disclosures in this document have been developed to increase the transparency of the supervisory stress test while maintaining its dynamism and effectiveness. See 84 Fed. Reg. 6651, 6664, 6784 (Feb. 28, 2019). Return to text