Appendix A: Model Changes for the 2021 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 2021 supervisory stress test, the Federal Reserve completed the phase-in of the enhanced models that project certain components of pre-provision net revenue (PPNR). The Federal Reserve began a two-year transition to an updated PPNR model in the 2020 supervisory stress test. The two-year phase-in policy was employed because the PPNR refinements materially affected projections for certain firms.111 Consistent with the Federal Reserve's stated policy for material model changes, the PPNR estimates for the 2020 supervisory stress test were the average of the results produced by model used in 2019 and the results produced under the updated model.112 PPNR estimates for the 2021 supervisory stress test will be fully phased in and only reflect the updated model.
In addition to this model change, the Federal Reserve made less material enhancements to simplify models and account for changes in the historical data used to estimate the models.113
References
111. Analysis was conducted using data and scenarios from the DFAST 2020 supervisory stress test. The effect on projections for the 2021 supervisory stress test and future tests is uncertain and will depend on changes in firm portfolios, data, and scenarios. Return to text
112. Starting in DFAST 2017, 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
113. 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 DFAST 2020 supervisory stress test. In cases in which a portfolio contains more than one change, materiality is defined by the net change. Return to text