Board of Governors of the Federal Reserve System

Modeled Loss Rates

The loss rates provided in this section are based on portfolio data as of December 31, 2019, and the supervisory severely adverse scenario published in February of 2020. The loss rates do not include the types of model adjustments described in box 2 of the December 2020 Stress Test Results disclosure document.⁹⁸

Corporate Loan Model

Modeled Loss Rates on Pools of Corporate Loans

The output of the corporate loan model is the expected loss on each loan. As described above, estimated corporate loan loss rates depend on a number of variables. This section groups loans according to three of the most important variables in the model: sector (financial and nonfinancial), security status (secured and unsecured), and rating class (investment grade and non-investment grade).⁹⁹ Categorizing corporate loans reported on schedule H.1 of the FR Y-14Q as of the fourth quarter of 2019 by sector, security status, and rating class results in eight groups of loans:¹⁰⁰

1. Financial, secured, investment grade
2. Financial, secured, non-investment grade
3. Financial, unsecured, investment grade
4. Financial, unsecured, non-investment grade
5. Nonfinancial, secured, investment grade
6. Nonfinancial, secured, non-investment grade
7. Nonfinancial, unsecured, investment grade
8. Nonfinancial, unsecured, non-investment grade

The remainder of this section reports summary statistics and modeled loss rates for these eight groups of corporate loans.

Table 19 reports summary statistics for the eight groups of loans. The summary statistics cover a wide set of variables that capture important characteristics of the loans and borrowers in the loan groups.

Table 20 shows the modeled loss rates for the eight groups of loans for the DFAST 2020 supervisory severely adverse scenario. Each entry in the table shows the portfolio-level (average) estimated loss rate for the loans in one of the eight groups, as well as the median and 25th and 75th percentiles of the estimated loan-level loss rates.

Table 19. Summary statistics of selected variables in the corporate loan data grouped by loan and borrower characteristics

Table 20. Projected corporate loan portfolio loss rates and 25th and 75th percentile ranges by loan and borrower characteristics, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Certain groups of loans generally have wider ranges of losses than other groups. Although the loans are grouped according to the most important characteristics in the model, other loan characteristics in the model also affect loss rates, albeit in a more limited manner. Differences in these other characteristics within each loan group are responsible for the range of loss rates shown in the tables. Greater variation in these other characteristics within a group will generally lead to larger ranges of loss rates. For example, among secured, non-investment grade loans, the range of loan-level loss rates is 4.8 to 7.5 for financial firms, compared to 4.3 to 13.3 for nonfinancial firms, which include a wider variety of industries (table 20). Secured, non-investment grade loans to nonfinancial firms are predominantly loans to firms in the manufacturing, transportation, and technology sectors but also include loans to firms in other sectors like education and utilities (table 19).

Portfolios of Hypothetical Corporate Loans and Associated Loss Rates

The effect of loan and borrower characteristics on the losses estimated by the corporate loan model can also be illustrated by the differences in the estimated loss rates on specific sets of hypothetical loans. This section contains descriptive statistics from three portfolios of hypothetical corporate loans (table 22) and the modeled loss rates for the three portfolios under the DFAST 2020 supervisory severely adverse scenario (table 23).

The Federal Reserve has designed the portfolios of hypothetical loans to have characteristics similar to the actual loans reported in schedule H.1 of the FR Y-14Q. The Federal Reserve provides three portfolios containing 200 loans each, designed to capture characteristics associated with

1. typical set of loans reported in the FR Y-14Q,
2. higher-than-average-risk loans (in this case, non-investment grade loans), and
3. lower-than-average-risk loans (in this case, investment grade loans).

The portfolios of hypothetical loans include 12 variables that describe characteristics of corporate loans that are generally used to estimate corporate loan losses (table 21).¹⁰¹

Table 22 contains summary statistics for the portfolios of hypothetical corporate loans in the same format as table 19. The portfolios of hypothetical loans are constructed to capture characteristics of certain sets of loans but are not fully representative of the population of loans reported in table 19. Table 23 contains the loss rates for the portfolios of hypothetical corporate loans calculated under the DFAST 2020 supervisory severely adverse scenario. The portfolio of higher-risk loans has higher loss rates under the severely adverse scenario (loss rate of 8.1 percent) than the portfolio of typical loans (loss rate of 5.6 percent) and the portfolio of lower-risk loans (loss rate of 2.0 percent).

Table 21. List of variables included in portfolios of hypothetical corporate loans

Table 22. Summary statistics of selected variables in the portfolios of hypothetical corporate loans

Table 23. Projected corporate loan portfolio loss rates, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Commercial Real Estate Loan Model

Modeled Loss Rates on Pools of CRE Loans

The output of the CRE loan model is the expected loss on each loan. As described above, estimated CRE loan loss rates depend on a number of variables. This section groups loans according to four of the most important variables in the model: the broad loan category (construction and income-producing loans), time to maturity, property type, and LTV ratio at origination. CRE loans reported on schedule H.2 of the FR Y-14Q as of the fourth quarter of 2019 are segmented by broad loan category, time to maturity, property type, and LTV ratio at origination into nine groups of CRE loans:¹⁰²

1. Construction loans
2. Time to maturity of three years or less; income-producing loans backed by hotel, retail, or office properties; LTV ratio at origination of 70 percent or below
3. Time to maturity of three years or less; income-producing loans backed by hotel, retail, or office properties; LTV ratio at origination of more than 70 percent
4. Time to maturity of three years or less; income-producing loans backed by other property types; LTV ratio at origination of 70 percent or below
5. Time to maturity of three years or less; income-producing loans backed by other property types; LTV ratio at origination of more than 70 percent
6. Time to maturity of more than three years; income-producing loans backed by hotel, retail, or office properties; LTV ratio at origination of 70 percent or below
7. Time to maturity of more than three years; income-producing loans backed by hotel, retail, or office properties; LTV ratio at origination of more than 70 percent
8. Time to maturity of more than three years; income-producing loans backed by other property types; LTV ratio at origination of 70 percent or below
9. Time to maturity of more than three years; income-producing loans backed by other property types; LTV ratio at origination of more than 70 percent

The remainder of this section reports summary statistics and modeled loss rates for these nine groups of CRE loans.

Table 24 reports summary statistics for the nine groups of loans. The summary statistics cover a wide set of variables that capture important characteristics of the loans and borrowers in the loan groups.

Table 24. Summary statistics of selected variables in the CRE loan data grouped by loan and borrower characteristics

Table 25 shows the modeled loss rates for the nine groups of CRE loans for the DFAST 2020 supervisory severely adverse scenario. Each entry in the table shows the portfolio-level (average) estimated loss rate for the loans in one of the nine groups, as well as the median and 25th and 75th percentiles of the estimated loan-level loss rates.

Table 25. Projected CRE portfolio loss rates and 25th and 75th percentile ranges by loan and borrower characteristics, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

The loans are grouped according to the most important characteristics in the model, but combinations of other loan characteristics in the model can also affect loss rates given the idiosyncratic nature of CRE lending risk. For example, loans collateralized by highly priced properties in markets with relatively high vacancy rates would experience outsized losses under stress as that collateral would be relatively illiquid during a downturn. Those idiosyncratic risks can result in outsized projected stress losses on a given loan, relative to other more typical loans in a segment. This feature of the market results in average loan loss rates that can be higher than the 75th percentile loan loss rates.

Portfolios of Hypothetical CRE Loans and Associated Loss Rates

The effect of loan and borrower characteristics on the losses estimated by the CRE model can also be illustrated by the differences in the estimated loss rates on specific sets of hypothetical loans. This section contains descriptive statistics from three portfolios of hypothetical CRE loans (table 27) and the modeled loss rates for the three portfolios under the DFAST 2020 supervisory severely adverse scenario (table 28).

The Federal Reserve has designed the portfolios of hypothetical loans to have characteristics similar to the actual loans reported in schedule H.2 of the FR Y-14Q. The Federal Reserve provides three portfolios containing 200 loans each, designed to capture characteristics associated with

1. typical set of loans reported in the FR Y-14Q,
2. higher-than-average-risk loans (in this case, loans with time to maturity of three years or less), and
3. lower-than-average-risk loans (in this case, loans with time to maturity of more than three years).

The portfolios of hypothetical loans include 10 variables that describe characteristics of CRE loans that are generally used to estimate CRE losses (table 26).¹⁰³

Table 27 contains summary statistics for the portfolios of hypothetical CRE loans in the same format as table 24. The portfolios of hypothetical loans are constructed to capture characteristics of certain sets of loans but are not fully representative of the population of loans reported in table 24. Table 28 contains the loss rates for the portfolios of hypothetical CRE loans calculated under the DFAST 2020 supervisory severely adverse scenario. The portfolio of higher-risk loans has higher loss rates under the severely adverse scenario (loss rate of 13.3 percent) than the portfolio of typical loans (loss rate of 4.8 percent) and the portfolio of lower-risk loans (loss rate of 2.4 percent).

Table 26. List of variables included in portfolios of hypothetical CRE loans

Table 27. Summary statistics of selected variables in the portfolios of hypothetical CRE loans

Table 28. Projected CRE portfolio loss rates, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Domestic First-Lien Residential Mortgage Model

Modeled Loss Rates on Pools of First-Lien Mortgages

The output of the first-lien mortgage model is the expected loss on each loan. As described above, estimated first-lien mortgage loss rates depend on a number of variables. In this section, loans are segmented according to two of the most important variables in the model: the LTV ratio at origination and the borrower's commercially available credit score. FICO® Scores are the most widely used commercially available credit scores in the historical data used to estimate the model.¹⁰⁴ First-lien mortgages reported on schedule A.1 of the FR Y-14M as of the fourth quarter of 2019 are segmented by LTV ratio and FICO® Score into six groups of loans:¹⁰⁵

1. Loans with LTV ratio of 80 percent or less and borrower FICO® Score under 680
2. Loans with LTV ratio of 80 percent or less and borrower FICO® Score between 680 and 739
3. Loans with LTV ratio of 80 percent or less and borrower FICO® Score of 740 or greater
4. Loans with LTV ratio of more than 80 percent and borrower FICO® Score under 680
5. Loans with LTV ratio of more than 80 percent and borrower FICO® Score between 680 and 739
6. Loans with LTV ratio of more than 80 percent and borrower FICO® Score of 740 or greater

The remainder of this section reports summary statistics and modeled loss rates for these six groups of first-lien mortgages.

Table 29 reports summary statistics for the six groups of loans. The summary statistics cover a wide set of variables that capture important characteristics of the loans and borrowers in the loan groups.

Table 29. Summary statistics of selected variables in the first-lien mortgage data grouped by loan and borrower characteristics

Table 30 shows the modeled loss rates for the six groups of loans for the DFAST 2020 supervisory severely adverse scenario. Each entry in the table shows the portfolio-level (average) estimated loss rate for the loans in one of the six groups, as well as the median and 25th and 75th percentiles of the estimated loan-level loss rates.

Table 30. Projected first-lien mortgage portfolio loss rates and 25th and 75th percentile ranges by loan and borrower characteristics, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Certain groups of loans generally have wider ranges of losses than other groups. Although the loans are grouped according to the most important characteristics in the model, other loan characteristics in the model also affect loss rates, albeit in a more limited manner. Differences in these other characteristics within each loan group are responsible for the range of loss rates shown in the tables. Greater variation in these other characteristics within a group will generally lead to larger ranges of loss rates. For example, the loan-level loss rates shown in table 30 range from 1.3 percent to 12.2 percent for loans with borrower FICO® Scores below 680, a category in which other loan characteristics vary widely. However, loan-level loss rates range from 0.2 percent to 2.5 percent for loans with borrower FICO® Scores above 740, a category in which there is less variation in other loan characteristics.

Portfolios of Hypothetical First-Lien Mortgages and Associated Loss Rates

The effect of loan and borrower characteristics on the losses estimated by the first-lien model can also be illustrated by the differences in the estimated loss rates on specific sets of hypothetical loans. This section contains descriptive statistics from three portfolios of hypothetical loans (table 32) and the modeled loss rates for the three portfolios under the DFAST 2020 supervisory severely adverse scenario (table 33).

The Federal Reserve has designed the portfolios of hypothetical first-lien mortgages to have characteristics similar to the actual loans reported in schedule A.1 of the FR Y-14M. The Federal Reserve provides three portfolios containing 200 loans each, designed to capture characteristics associated with

1. typical set of loans reported in the FR Y-14Q,
2. higher-than-average-risk loans (in this case, loans with LTV at origination of more than 80 percent), and
3. lower-than-average-risk loans (in this case, loans with LTV at origination of 80 percent or lower).

The portfolios of hypothetical loans include 13 variables that describe characteristics of first-lien mortgages that are generally used to estimate first-lien mortgage losses (table 31).¹⁰⁶

Table 32 contains summary statistics for the portfolios of hypothetical loans in the same format as table 29. The portfolios of hypothetical loans are constructed to capture characteristics of certain sets of loans but are not fully representative of the population of loans reported in table 29. Table 33 contains the loss rates for the portfolios of hypothetical loans calculated under the DFAST 2020 supervisory severely adverse scenario. The portfolio of higher-risk loans has higher loss rates under the severely adverse scenario (loss rate of 4.1 percent) than the portfolio of typical loans (loss rate of 1.6 percent) and the portfolio of lower-risk loans (loss rate of 1.1 percent).

Table 31. List of variables included in portfolios of hypothetical first-lien mortgages

Table 32. Summary statistics of selected variables in the portfolios of hypothetical first-lien mortgages

Table 33. Projected first-lien mortgage portfolio loss rates, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Domestic Credit Card Model

Modeled Loss Rates on Pools of Credit Card Accounts

The output of the domestic credit card model is the expected loss on each account. As described above, the Federal Reserve uses the credit card model to project losses on domestic bank cards and domestic charge cards, and estimated credit card loss rates depend on a number of variables. This section groups domestic bank card accounts (credit card accounts) according to their commercially available credit score, which is one of the most important variables in the model. FICO® Scores are the most widely used commercially available credit scores in the historical data used to estimate the model.¹⁰⁷ Credit card accounts reported on schedule D.1 of the FR Y-14M report as of the fourth quarter of 2019 are segmented by FICO® Score into four groups of accounts:¹⁰⁸

1. Accounts with FICO® Score under 650
2. Accounts with FICO® Score from 650 to 699
3. Accounts with FICO® Score from 700 to 749
4. Accounts with FICO® Score above 750

The remainder of this section reports summary statistics and modeled loss rates for these four groups of credit card accounts.

Table 34 reports summary statistics for the four groups of credit card accounts. The summary statistics cover a wide set of variables that capture important account characteristics.

Table 34. Summary statistics of selected variables in the credit card data by credit score

Table 35 shows the modeled loss rates for the four groups of accounts under the DFAST 2020 supervisory severely adverse scenario. Each entry in the table shows the portfolio-level (average) estimated loss rate for the accounts in one of the four groups, as well as the median and 25th and 75th percentiles of the estimated account-level loss rates.

Table 35. Projected credit card portfolio loss rates and 25th and 75th percentile ranges by credit score, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Certain groups of accounts generally have wider ranges of losses than other groups. Although accounts are grouped according to one of the most important characteristics in the model, other account characteristics in the model also affect loss rates, albeit in a more limited manner. Differences in these other characteristics within each account group are responsible for the range of loss rates shown in the tables. Greater variation in these other characteristics within a group will generally lead to larger ranges of loss rates. For example, the account-level loss rates shown in table 35 range from 30.3 percent to 65.0 percent for accounts with FICO® Scores below 650, a category in which other account characteristics vary widely. However, account-level loss rates range from 4.3 percent to 14.0 percent for accounts with FICO® Scores above 750, a category in which there is less variation in other account characteristics.

Portfolios of Hypothetical Credit Card Accounts and Associated Loss Rates

The effect of account characteristics on the losses estimated by the credit card loss model can also be illustrated by the differences in the estimated loss rates on specific sets of hypothetical accounts. This section contains descriptive statistics for three portfolios of hypothetical accounts (table 37) and the modeled loss rates for the three portfolios under the DFAST 2020 supervisory severely adverse scenario (table 38).

The Federal Reserve has designed the portfolios of hypothetical accounts to have characteristics similar to the actual accounts reported in schedule D.1 of the FR Y-14M. The Federal Reserve provides three portfolios containing 200 accounts each, designed to capture characteristics associated with

1. typical set of accounts reported in the FR Y-14M,
2. higher-than-average-risk accounts (in this case, accounts with FICO® Scores under 700), and
3. lower-than-average-risk accounts (in this case, accounts with FICO® Scores 700 and greater).

The portfolios of hypothetical accounts include 12 variables that describe characteristics of credit card accounts that are generally used to estimate credit card losses (table 36).¹⁰⁹

Table 37 contains summary statistics for the portfolios of hypothetical credit card accounts in the same format as table 34. The portfolios of hypothetical accounts are constructed to capture characteristics of certain sets of accounts but are not fully representative of the population of accounts reported in table 34. Table 38 contains the loss rates for the portfolios of hypothetical credit card accounts calculated under the DFAST 2020 supervisory severely adverse scenario. The portfolio of higher-risk accounts has higher loss rates under the severely adverse scenario (loss rate of 29.3 percent) than the portfolio of typical accounts (loss rate of 19.0 percent) and the portfolio of lower-risk accounts (loss rate of 7.8 percent).

Table 36. List of variables included in portfolios of hypothetical credit card accounts

Table 37. Summary statistics of selected variables in the portfolios of hypothetical credit card accounts

Table 38. Projected credit card portfolio loss rates, 2020:Q1–2022:Q1, DFAST 2020 severely adverse scenario

Explanatory Notes on Model Disclosures

The model disclosures in this document focus on the design of and projections from specific models, whereas the disclosures of supervisory stress test results include projections aggregated to the portfolio level. In most cases, those portfolio-level aggregates contain outputs from multiple supervisory models. As such, the results shown in the two different disclosures will be different.

This document includes disclosures of loss rates on loan and account segments and on hypothetical portfolios of loans and accounts. These loss rates differ from those included in the stress test results disclosures in that they do not include accounting and other adjustments used to translate projected credit losses into net income. In the supervisory stress test results disclosure, the Federal Reserve makes certain accounting adjustments to translate supervisory model estimates into provisions and other income or expense items needed to calculate stressed pre-tax net income. These adjustments often depend on factors that vary across participating firms, such as write-down amounts on accounts purchased with credit impairments. Further, the loss rates do not include the types of model adjustments described in box 2 of the December 2020 Stress Test Results disclosure document.¹¹⁰

 

References

 

 98. See Board of Governors of the Federal Reserve, "Box 2. Model Adjustments," December 2020 Stress Test Results (Washington: Board of Governors, December 2020), 20, https://www.federalreserve.gov/publications/files/2020-dec-stress-test-results-20201218.pdf. Return to text

 99. Financial loans have a NAICS category ("naics_two_digit_cat") of 52; all other loans are marked nonfinancial. Secured loans are defined as loans with lien positions ("lien_position_cat") marked as "first-lien senior"; all other loans are marked as unsecured. Investment grade loans are defined as loans with a credit rating ("rating") higher than and including BBB; all other loans are marked as non-investment grade. Return to text

 100. The set of loans on which loss rates are calculated excludes loans held for sale or accounted for under the fair-value option, loan observations missing data fields used in the model, lines of credit that were undrawn as of 2019:Q4, and other types of loans that are not modeled using the corporate loan model. Return to text

 101. The sets of accounts are available for download on the Federal Reserve's website: higher-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/corporate-high-risk-2021.csv; typical-risk accounts, https://www.federalreserve.gov/supervisionreg/files/corporate-typical-risk-2021.csv; lower-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/corporate-low-risk-2021.csv. Return to text

 102. The set of loans presented in this table excludes loans held for sale or accounted for under the fair-value option, loan observations lacking enough reported information to be assigned a modeled loss rate, loans that were in default or had no outstanding or committed balance remaining as of 2019:Q4, and other types of loans that are not modeled using the CRE loan model. Return to text

 103. The sets of accounts are available for download on the Federal Reserve's website: higher-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/cre-high-risk-2021.csv; typical-risk accounts, https://www.federalreserve.gov/supervisionreg/files/cre-typical-risk-2021.csv; lower-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/cre-low-risk-2021.csv. Return to text

 104. FR Y-14 reporters are not required to report a particular credit score. For the purposes of making projections using a model estimated with FICO® Scores, the Federal Reserve maps scores reported on the FR Y-14 to FICO® Scores. Return to text

 105. The set of loans presented in this table excludes loans held for sale or accounted for under the fair-value option, loan observations missing data fields used in the model, loans that were in default or had no unpaid balance remaining as of 2019:Q4, loans that were purchased credit-impaired, and other types of loans that are not modeled using the domestic first-lien mortgage model (e.g., commercial loans). Return to text

 106. The sets of accounts are available for download on the Federal Reserve's website: higher-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/usfirstlien-high-risk-2021.csv; typical-risk accounts, https://www.federalreserve.gov/supervisionreg/files/usfirstlien-typical-risk-2021.csv; lower-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/usfirstlien-low-risk-2021.csv. Return to text

 107. FR Y-14 reporters are not required to report a particular credit score. For the purposes of making projections using a model estimated with FICO® Scores, the Federal Reserve maps scores reported on the FR Y-14 to FICO® Scores. Return to text

 108. The set of accounts presented in this table excludes accounts held for sale or accounted for under the fair-value option, observations missing data fields used in the model, accounts with 0–1 percent utilization rate as of 2019:Q4, and other types of accounts that are not modeled using the credit card model. Return to text

 109. The sets of accounts are available for download on the Federal Reserve's website: higher-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/cards-high-risk-2021.csv; typical-risk accounts, https://www.federalreserve.gov/supervisionreg/files/cards-typical-risk-2021.csv; lower-than-average-risk accounts, https://www.federalreserve.gov/supervisionreg/files/cards-low-risk-2021.csv. Return to text

 110. See Board of Governors of the Federal Reserve, "Box 2. Model Adjustments," December 2020 Stress Test Results (Washington: Board of Governors, December 2020), 20, https://www.federalreserve.gov/publications/files/2020-dec-stress-test-results-20201218.pdf. Return to text