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​Federal Home Loan Bank Stress Tests for Market and Credit Risk


In General

FHFA has developed market and credit risk related macroeconomic scenarios that it provides to the Federal Home Loan Banks (Banks).  These scenarios are inputs to financial models that the Banks use to assess the exposure of their entire portfolio to market risk, and the exposure of their mortgage-related assets to credit risk.  These exposures are measures of the potential loss in market value under stressful economic conditions.  FHFA updates both the market and credit risk macroeconomic scenarios quarterly.


Market Risk Macroeconomic Scenarios

The FHFA market risk scenarios are comprised of instantaneous shocks to current measures of three key interest rates, two measures of implied volatility, and one OAS measure.  FHFA derives the scenarios from the actual historical changes in interest rates observed over 6-month intervals, measured from the first day of each month extending back to 1998.  FHFA has determined that the breadth of movements in interest rates over this historical period, especially during 2007 - 2011, is sufficient to result in a number of scenarios that constitute stressful economic conditions as applied to each Bank’s portfolio.  Bank use of the scenarios for the purpose of measuring the market-risk based capital requirement will be considered compliant with FHFA guidance.

A brief description of the methodology used to generate the scenarios, references to FHFA working papers describing that methodology, and the historically-based macroeconomic market risk scenarios are available here.


Credit Risk Macroeconomic Scenarios for Stress-Testing Mortgage Related Assets

The FHFA credit risk scenarios for mortgage assets are comprised of 30-year time paths for several interest rates and state-level house price indexes (HPIs).  The scenarios are constructed to represent worst-case, yet plausible, paths for house price levels.  Since each mortgage loan is collateralized by the property, mortgage holders generally do not suffer a credit loss unless the underlying property has suffered a loss in market value, or price.  Consequently, the macroeconomic scenario is made stressful by subjecting the mortgage assets to a downward shock in HPI, accompanied by a drop in interest rates as is likely to occur during an economic recession.  Bank use of the scenarios for measuring the credit risk of mortgage assets is compliant with FHFA guidance.    

A brief description of the methodology used to generate the scenarios, references to FHFA working papers describing that methodology, and the historically-based macroeconomic market risk scenarios are available here.

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