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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.
The FHFA market risk scenarios are comprised of instantaneous shocks to current measures of four key interest rates, implied volatility, and option-adjusted spreads. FHFA derives its interest rate shocks from historical interest rate changes observed over successive 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 market-risk based capital requirements will be considered compliant with FHFA guidance.
A brief description of the methodology used to generate the scenarios, references to FHFA working papers describing the methodology, and the historically-based market risk scenarios are available here.
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
Page last updated: July 17, 2023
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