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70124 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules Regulation and Regulatory Review.’’ Executive Order 13563 directs Federal agencies to develop and submit a preliminary plan ‘‘under which the agency will periodically review its existing significant regulations to determine whether any such regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives.’’ Executive Order 13563 did not, however, apply to independent regulatory agencies. Subsequently, on July 11, 2011, the President issued E.O. 13579, which recommends that independent regulatory agencies also develop retrospective plans similar to those required of other agencies under E.O. 13563. In the spirit of cooperation, in November 2011, in response to E.O. 13579, the NRC made available an initial Plan on the NRC’s Public Web site. The NRC has now updated its initial Plan and has created a draft Plan. The draft Plan is available at the following locations: (1) On the NRC’s Open Government Web page at http:// www.nrc.gov/public-involve/open.html (under the tabs entitled ‘‘Selected NRC Resources’’ and ‘‘Rulemaking’’); (2) on the NRC’s plans, budget, and performance Web page at http:// www.nrc.gov/about-nrc/plansperformance.html); and (3) on http:// www.regulations.gov. The NRC is accepting public comment on this draft Plan. emcdonald on DSK7TPTVN1PROD with PROPOSALS III. Plan for Retrospective Review The NRC’s draft Plan describes the NRC’s processes and activities relating to retrospective review of existing regulations, including discussions of the: (1) Efforts to incorporate risk assessments into regulatory decisionmaking; (2) efforts to address the cumulative effects of regulation; (3) the NRC’s methodology for prioritizing its rulemaking activities; (4) rulemaking initiatives arising out of the NRC’s ongoing review of its regulations related to the recent events at the Fukushima Dai-ichi Nuclear Power Plant in Japan; and (5) the NRC’s previous and ongoing efforts to update its regulations in a systematic, ongoing basis. For the Nuclear Regulatory Commission. Dated at Rockville, Maryland, this 16th day of November 2012. Annette L. Vietti-Cook, Secretary of the Commission. [FR Doc. 2012–28436 Filed 11–21–12; 8:45 am] BILLING CODE 7590–01–P VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 FEDERAL RESERVE SYSTEM 12 CFR Part 252 [Regulation YY; Docket No. OP–1452] RIN 7100–AD–86 Policy Statement on the Scenario Design Framework for Stress Testing Board of Governors of the Federal Reserve System (Board). ACTION: Proposed policy statement with request for public comment. AGENCY: The Board is requesting public comment on a policy statement on the approach to scenario design for stress testing that would be used in connection with the supervisory and company-run stress tests conducted under the Board’s Regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act or Act) and the Board’s capital plan rule. DATES: Comments must be received by February 15, 2013. FOR FURTHER INFORMATION CONTACT: Tim Clark, Senior Associate Director, (202) 452–5264, Lisa Ryu, Assistant Director, (202) 263–4833, or David Palmer, Senior Supervisory Financial Analyst, (202) 452–2904, Division of Banking Supervision and Regulation; Benjamin W. McDonough, Senior Counsel, (202) 452–2036, or Christine Graham, Senior Attorney, (202) 452–3099, Legal Division; or Andreas Lehnert, Deputy Director, (202) 452–3325, or Rochelle Edge, Adviser, (202) 452–2339, Office of Financial Stability Policy and Research. SUPPLEMENTARY INFORMATION: SUMMARY: Table of Contents I. Background II. Administrative Law Matters A. Use of Plain Language B. Paperwork Reduction Act Analysis C. Regulatory Flexibility Act Analysis I. Background Stress testing is a tool that helps both bank supervisors and a banking organization measure the sufficiency of capital available to support the banking organization’s operations throughout periods of stress.1 The Board and the other federal banking agencies previously have highlighted the use of stress testing as a means to better understand the range of a banking organization’s potential risk exposures.2 1 A full assessment of a company’s capital adequacy must take into account a range of risk factors, including those that are specific to a particular industry or company. 2 See, e.g., Supervisory Guidance on Stress Testing for Banking Organizations With More Than PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 In particular, as part of its effort to stabilize the U.S. financial system during the 2007–2009 financial crisis, the Board and the Federal Reserve banks, along with other federal financial regulatory agencies, conducted stress tests of large, complex bank holding companies through the Supervisory Capital Assessment Program (SCAP). The SCAP was a forward-looking exercise designed to estimate revenue, losses, and capital needs under an adverse economic and financial market scenario. By looking at the broad capital needs of the financial system and the specific needs of individual companies, these stress tests provided valuable information to market participants, reduced uncertainty about the financial condition of the participating bank holding companies under a scenario that was more adverse than that which was anticipated to occur at the time, and had an overall stabilizing effect. Building on the SCAP and other supervisory work coming out of the crisis, the Board initiated the annual Comprehensive Capital Analysis and Review (CCAR) in late 2010 to assess the capital adequacy and the internal capital planning processes of the same large, complex bank holding companies $10 Billion in Total Consolidated Assets, 77 FR 29458 (May 17, 2012), available at http://www. federalreserve.gov/bankinforeg/srletters/sr1207a1. pdf; Supervision and Regulation Letter SR 10–6, Interagency Policy Statement on Funding and Liquidity Risk Management (March 17, 2010), available at http://www.federalreserve.gov/ boarddocs/srletters/2010/sr1006a1.pdf; Supervision and Regulation Letter SR 10–1, Interagency Advisory on Interest Rate Risk (January 11, 2010), available at http://www.federalreserve.gov/ boarddocs/srletters/2010/SR1001.pdf; Supervision and Regulation Letter SR 09–4, Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies (revised March 27, 2009), available at http://www. federalreserve.gov/boarddocs/srletters/2009/ SR0904.htm; Supervision and Regulation Letter SR 07–1, Interagency Guidance on Concentrations in Commercial Real Estate (Jan. 4, 2007), available at http://www.federalreserve.gov/boarddocs/srletters/ 2007/SR0701.htm; Supervision and Regulation Letter SR 12–7, Supervisory Guidance on Stress Testing for Banking Organizations with More Than $10 Billion in Total Consolidated Assets (May 14, 2012), available at http://www.federalreserve.gov/ bankinforeg/srletters/sr1207.htm; Supervision and Regulation Letter SR 99–18, Assessing Capital Adequacy in Relation to Risk at Large Banking Organizations and Others with Complex Risk Profiles (July 1, 1999), available at http://www. federalreserve.gov/boarddocs/srletters/1999/ SR9918.htm; Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advanced Capital Framework, 73 FR 44620 (July 31, 2008); The Supervisory Capital Assessment Program: SCAP Overview of Results (May 7, 2009), available at http://www.federalreserve.gov/ newsevents/press/bcreg/bcreg20090507a1.pdf; and Comprehensive Capital Analysis and Review: Objectives and Overview (Mar. 18, 2011), available at http://www.federalreserve.gov/newsevents/press/ bcreg/bcreg20110318a1.pdf. E:\FR\FM\23NOP1.SGM 23NOP1 emcdonald on DSK7TPTVN1PROD with PROPOSALS Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules that participated in SCAP and to incorporate stress testing as part of the Board’s regular supervisory program for assessing capital adequacy and capital planning practices at these large bank holding companies. The CCAR represents a substantial strengthening of previous approaches to assessing capital adequacy and promotes thorough and robust processes at large banking organizations for measuring capital needs and for managing and allocating capital resources. The CCAR focuses on the risk measurement and management practices supporting organizations’ capital adequacy assessments, including their ability to deliver credible inputs to their loss estimation techniques, as well as the governance processes around capital planning practices. On November 22, 2011, the Board issued an amendment (capital plan rule) to its Regulation Y to require all U.S. bank holding companies with total consolidated assets of $50 billion or more to submit annual capital plans to the Board to allow the Board to assess whether they have robust, forwardlooking capital planning processes and have sufficient capital to continue operations throughout times of economic and financial stress.3 In the wake of the financial crisis, Congress enacted the Dodd-Frank Act, which requires the Board to implement enhanced prudential supervisory standards, including requirements for stress tests, for covered companies to mitigate the threat to financial stability posed by these institutions.4 Section 165(i)(1) of the Dodd-Frank Act requires the Board to conduct an annual stress test of each bank holding company with total consolidated assets of $50 billion or more and each nonbank financial company that the Council has designated for supervision by the Board (covered company) to evaluate whether the covered company has sufficient capital, on a total consolidated basis, to absorb losses as a result of adverse economic conditions (supervisory stress tests).5 The Act requires that the supervisory stress test provide for at least three different sets of conditions— baseline, adverse, and severely adverse conditions—under which the Board would conduct its evaluation. The Act also requires the Board to publish a summary of the supervisory stress test results. In addition, section 165(i)(2) of the Dodd-Frank Act requires the Board to 3 See Capital Plans, 76 FR 74631 (Dec. 1, 2011) (codified at 12 CFR 225.8). 4 See section 165(i) of the Dodd-Frank Act; 12 U.S.C. 5365(i). 5 See 12 U.S.C. 5365(i)(1). VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 issue regulations that require covered companies to conduct stress tests semiannually and require financial companies with total consolidated assets of more than $10 billion that are not covered companies and for which the Board is the primary federal financial regulatory agency to conduct stress tests on an annual basis (collectively, company-run stress tests).6 The Board issued final rules implementing the stress test requirements of the Act on October 12, 2012 (stress test rules).7 The Board’s stress test rules provide that the Board will notify covered companies, by no later than November 15 of each year of a set of conditions (each set, a scenario), it will use to conduct its annual supervisory stress tests.8 The rules further establish that the Board will provide, also by no later than November 15, covered companies and other banking organizations subject to the final rule the scenarios they must use to conduct their annual companyrun stress tests.9 Under the stress test rules, the Board may require certain companies to use additional components in the adverse or severely adverse scenario or additional scenarios.10 For example, the Board expects to require large banking organizations with significant trading activities to include global market shock components (described in the following sections) in their adverse and severely adverse scenarios. The Board will provide any additional components or scenarios by no later than December 1 of each year.11 The Board expects that the scenarios it will require the companies to use will be the same as those the Board will use to conduct its supervisory stress tests (together, stress test scenarios). Stress tests required under the stress test rules and under the Board’s capital plan rule require the Board and financial institutions to calculate proforma capital levels—rather than ‘‘current’’ or actual levels—over a specified planning horizon under baseline and stressed scenarios. This approach integrates key lessons of the 2007–2009 financial crisis into the Board’s supervisory framework. In the financial crisis, investor and counterparty confidence in the capitalization of financial institutions 6 12 U.S.C. 5365(i)(2). FR 62398 (October 12, 2012); 12 CFR part 252, subparts F–H. 8 See id.; 12 CFR 252.134(b). 9 See id.; 12 CFR 252.144(b), 154(b). The annual company-run stress tests use data as of September 30 of each calendar year. 10 12 CFR 252.144(b), 154(b). 11 Id. 7 77 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 70125 eroded rapidly in the face of changes in the current and expected economic and financial conditions, and this loss in market confidence imperiled institutions’ ability to access funding, continue operations, serve as a credit intermediary, and meet obligations to creditors and counterparties. Importantly, such a loss in confidence occurred even when a financial institution’s capital ratios exceeded the regulatory minimums. This is because the institution’s capital ratios were perceived as lagging indicators of its financial condition, particularly when conditions were changing. The stress tests required under the stress test rules and capital plan rule are a valuable supervisory tool that provides a forward-looking assessment of large financial institutions’ capital adequacy under hypothetical economic and financial market conditions. Currently, these stress tests primarily focus on credit risk and market risk— that is, risk of mark-to-market losses associated with firms’ trading and counterparty positions—and not on other types of risk, such as liquidity risk or operational risk unrelated to the macroeconomic environment. Pressures stemming from these sources are considered in separate supervisory exercises. No single supervisory tool, including the stress tests, can provide an assessment of an institution’s ability to withstand every potential source of risk. Selecting appropriate scenarios is an especially significant consideration for stress tests required under the capital plan rule, which ties the review of a bank holding company’s performance under stress scenarios to its ability to make capital distributions. More severe scenarios, all other things being equal, generally translate into larger projected declines in a company’s capital. Thus, a company would need more capital today to meet its minimum capital requirements in more stressful scenarios and have the ability to continue making capital distributions, such as common dividend payments. This translation is far from mechanical; it will depend on factors that are specific to a given company, such as underwriting standards and the banking organization’s business model, which would also greatly affect projected revenue, losses, and capital. To enhance the transparency of the scenario design process, the Board is requesting public comment on a proposed policy statement (Policy Statement) that would be used to develop scenarios for annual supervisory and company-run stress tests under the stress testing rules E:\FR\FM\23NOP1.SGM 23NOP1 emcdonald on DSK7TPTVN1PROD with PROPOSALS 70126 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules issued under the Act and the capital plan rule. The Board plans to develop the annual set of scenarios, as outlined below, in consultation with the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) to reduce the burden that could arise from having the agencies establish inconsistent scenarios. The proposed Policy Statement outlines the characteristics of the stress test scenarios and explains the considerations and procedures that underlie the formulation of these scenarios. The considerations and procedures described in this policy statement would apply to the Board’s stress testing framework, including to the stress tests required under 12 CFR part 252, subparts F, G, and H, as well as the Board’s capital plan rule (12 CFR 225.8). The Board may determine that material modifications to the Policy Statement would be appropriate if the supervisory stress test framework expands materially to include additional components or other scenarios that are currently not captured.12 Although the Board does not envision that the approach used to develop scenarios would change from year to year, the characteristics of the scenarios provided to companies would reflect changes in the outlook for economic and financial conditions and changes to specific risks or vulnerabilities that the Board, in consultation with the other federal banking agencies, determines should be considered in the annual stress tests. The stress test scenarios should not be regarded as forecasts; rather, they are hypothetical paths of economic variables that would be used to assess the strength and resilience of the companies’ capital in various economic and financial environments. The proposed Policy Statement is organized as follows. Section 1 provides background on the proposed Policy Statement. Section 2 is an outline of the proposed Policy Statement and describes its scope. Section 3 provides a broad description of the baseline, adverse, and severely adverse scenarios and describes the types of variables that the Board expects to include in the macro scenarios and the market shock component of the stress test scenarios applicable to firms with significant trading activity.13 The proposed approach for the macro scenarios differs considerably from that for the market shocks, and, therefore, they are described separately. Section 4 describes the Board’s proposed approach for developing the macro scenarios, and section 5 describes the proposed approach for the market shock components. Section 6 describes the relationship between the macro scenario and the market shock components. Section 7 provides a timeline for the formulation and publication of the macroeconomic assumptions and market shocks. Consistent with the stress testing rules and the Act, the Board will issue a minimum of three different scenarios, including baseline, adverse, and severely adverse scenarios, for use under the stress test rules. Specific circumstances or vulnerabilities, over which the Board determines, in any given year, require particular vigilance to ensure the resilience of the banking sector, will be captured in either the adverse or severely adverse scenarios. A greater number of scenarios could be needed in some years—for example, because the Board identifies a large number of unrelated and uncorrelated but nonetheless significant risks. While the Board generally expects to use the same scenarios for all companies subject to the stress testing rules, it may require a subset of companies— depending on a company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy—to include additional scenario components or additional scenarios that are designed to capture different effects of adverse events on revenue, losses, and capital. One example of such components is the market shock that applies only to trading companies. Additional components or scenarios may also include other stress factors that may not necessarily be directly correlated to macroeconomic or financial assumptions but nevertheless can materially affect companies’ risks, such as the unexpected default of a major counterparty. Early in each stress testing cycle, the Board plans to publish the macro scenarios along with a brief narrative summary that explains how these scenarios have changed relative to the previous year. In cases where scenarios are modified to reflect particular risks 12 Before requiring a company to include additional components or other scenarios in its company-run stress tests, the Board would follow the notice procedures set forth in the stress test rules. See 12 CFR 252.144(b), 154(b). 13 Currently, the firms subject to the market shock component include the six bank holding companies that are subject to the market risk rule and have total consolidated assets greater than $500 billion, as reported on their FR Y–9C. However, the set of companies subject to the market shock could change over time as the size, scope, and complexity of the banking organization’s trading activities evolve. VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 and vulnerabilities, the narrative would also explain the underlying motivation for these changes. The Board also plans to release a broad description of the market shock component. The Board seeks comment on all aspects of the proposed Policy Statement. The Board notes that it will not revise the baseline, adverse, and severely adverse scenarios or market shock component that were recently issued under the Board’s stress test rules and the capital plan rule for CCAR 2013 in light of any comments on the proposed policy statement but will consider the comments in developing future macro scenarios. Question 1. In what ways could the Board improve its approach to scenario design? What additional economic or financial variables should the Board consider in developing scenarios? Question 2. In addition to the trading shock, what additional components should the Board include in its stress testing framework? What additional scenarios should the Board consider using in connection with the stress testing framework? Question 3. The policy statement proposes a number of different methods for developing the adverse scenarios. What additional ways might the Board consider specifying the adverse scenario? Question 4. Does the approach for specifying the severely adverse scenarios—specifically, that of featuring a severe recession along with any salient risks to the economic and financial outlook—capture the relevant macroeconomic risks that firms face? Should there be additional features added to the scenario, either in specific circumstances or more generally? II. Administrative Law Matters A. Use of Plain Language Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Board has sought to present the proposed rule in a simple and straightforward manner, and invites comment on the use of plain language. B. Paperwork Reduction Act Analysis In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3506), the Board has reviewed the proposed policy statement to assess any information collections. There are no collections of information as defined by the Paperwork Reduction Act in the proposal. E:\FR\FM\23NOP1.SGM 23NOP1 emcdonald on DSK7TPTVN1PROD with PROPOSALS Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules C. Regulatory Flexibility Act Analysis In accordance with section 3(a) of the Regulatory Flexibility Act (RFA), the Board is publishing an initial regulatory flexibility analysis of the proposed policy statement. The RFA, 5 U.S.C. 601 et seq., requires each federal agency to prepare an initial regulatory flexibility analysis in connection with the promulgation of a proposed rule, or certify that the proposed rule will not have a significant economic impact on a substantial number of small entities.14 The RFA requires an agency either to provide an initial regulatory flexibility analysis with a proposed rule for which a general notice of proposed rulemaking is required or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. Based on its analysis and for the reasons stated below, the Board believes that the proposed policy statement will not have a significant economic impact on a substantial number of small entities. Under regulations issued by the Small Business Administration (SBA), a ‘‘small entity’’ includes those firms within the ‘‘Finance and Insurance’’ sector with asset sizes that vary from $7 million or less in assets to $175 million or less in assets.15 The Board believes that the Finance and Insurance sector constitutes a reasonable universe of firms for these purposes because such firms generally engage in actives that are financial in nature. Consequently, bank holding companies or nonbank financial companies with assets sizes of $175 million or less are small entities for purposes of the RFA. As discussed in the SUPPLEMENTARY INFORMATION, the proposed policy statement generally would affect the scenario design framework used in regulations that apply to bank holding companies with $50 billion or more in total consolidated assets and nonbank financial companies that the Council has determined under section 113 of the Dodd-Frank Act must be supervised by the Board and for which such determination is in effect. Companies that are affected by the proposed policy statement therefore substantially exceed the $175 million asset threshold at which a banking entity is considered a ‘‘small entity’’’ under SBA regulations.16 The proposed policy 14 See 5 U.S.C. 603, 604 and 605. CFR 121.201. 16 The Dodd-Frank Act provides that the Board may, on the recommendation of the Council, increase the $50 billion asset threshold for the application of certain of the enhanced standards. See 12 U.S.C. 5365(a)(2)(B). However, neither the Board nor the Council has the authority to lower such threshold. 15 13 VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 statement would affect a nonbank financial company designated by the Council under section 113 of the DoddFrank Act regardless of such a company’s asset size. Although the asset size of nonbank financial companies may not be the determinative factor of whether such companies may pose systemic risks and would be designated by the Council for supervision by the Board, it is an important consideration.17 It is therefore unlikely that a financial firm that is at or below the $175 million asset threshold would be designated by the Council under section 113 of the Dodd-Frank Act because material financial distress at such firms, or the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities, are not likely to pose a threat to the financial stability of the United States. As noted above, because the proposed policy statement is not likely to apply to any company with assets of $175 million or less, if adopted in final form, it is not expected to affect any small entity for purposes of the RFA. The Board does not believe that the proposed policy statement duplicates, overlaps, or conflicts with any other Federal rules. In light of the foregoing, the Board does not believe that the proposed policy statement, if adopted in final form, would have a significant economic impact on a substantial number of small entities supervised. Nonetheless, the Board seeks comment on whether the proposed policy statement would impose undue burdens on, or have unintended consequences for, small organizations, and whether there are ways such potential burdens or consequences could be minimized in a manner consistent its purpose. List of Subjects in 12 CFR Part 252 Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Nonbank Financial Companies Supervised by the Board, Reporting and recordkeeping requirements, Securities, Stress Testing. Authority and Issuance For the reasons stated in the the Board of Governors of the Federal Reserve System proposes to add the Policy Statement as set forth at the end of the SUPPLEMENTARY INFORMATION as part 252 to 12 CFR chapter II as follows: SUPPLEMENTARY INFORMATION, 17 See PO 00000 76 FR 4555 (January 26, 2011). Frm 00005 Fmt 4702 Sfmt 4702 70127 PART 252—ENHANCED PRUDENTIAL STANDARDS (Regulation YY) 1. The authority citation for part 252 would continue to read as follows: Authority: 12 U.S.C. 321–338a, 1467a(g), 1818, 1831p–1, 1844(b), 1844(c), 5361, 5365, 5366. 2. Appendix A to part 252 would be added to read as follows: Appendix A—Policy Statement on the Scenario Design Framework for Stress Testing 1. Background The Board has imposed stress testing requirements through its regulations implementing section 165(i) of the DoddFrank Act (stress test rules) and through its capital plan rule (12 CFR 225.8). Under the stress test rules issued under section 165(i)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Act), the Board conducts an annual stress test (supervisory stress tests), on a consolidated basis, of each bank holding company with total consolidated assets of $50 billion or more and each nonbank financial company that the Financial Stability Oversight Council has designated for supervision by the Board (together, covered companies).18 In addition, under the stress test rules issued under section 165(i)(2) of the Act, covered companies must conduct stress tests semiannually and other financial companies with total consolidated assets of more than $10 billion and for which the Board is the primary regulatory agency must conduct stress tests on an annual basis (together company-run stress tests).19 The Board will provide for at least three different sets of conditions (each set, a scenario), including baseline, adverse, and severely adverse scenarios for both supervisory and companyrun stress tests.20 18 12 U.S.C. 5365(i)(1); 77 FR 62378 (October 12, 2012), to be codified at 12 CFR part 252, subpart F. 19 12 U.S.C. 5365(i)(2); 77 FR 62378, 62396 (October 12, 2012), to be codified at 12 CFR part 252, subparts G and H. 20 The stress test rules define scenarios as ‘‘those sets of conditions that affect the U.S. economy or the financial condition of a [company] that the Board annually determines are appropriate for use in stress tests, including, but not limited to, baseline, adverse, and severely adverse scenarios.’’ The stress test rules define baseline scenario as a ‘‘set of conditions that affect the U.S. economy or the financial condition of a company and that reflect the consensus views of the economic and financial outlook.’’ The stress test rules define adverse scenario a ‘‘set of conditions that affect the U.S. economy or the financial condition of a company that are more adverse than those associated with the baseline scenario and may include trading or other additional components.’’ The stress test rules define severely adverse scenario as a ‘‘set of conditions that affect the U.S. economy or the financial condition of a company and that overall are more severe than those associated with the adverse scenario and may include trading or other additional components.’’ See 12 CFR 252.132(a), (d), (m), and (n); 12 CFR 252.142(a), (d), (o), and (p); 12 CFR 252.152(a), (e), (o), and (p). E:\FR\FM\23NOP1.SGM 23NOP1 emcdonald on DSK7TPTVN1PROD with PROPOSALS 70128 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules The stress test rules provide that the Board will notify covered companies by no later than November 15 of each year scenarios it will use to conduct its annual supervisory stress tests and provide, also by no later than November 15, covered companies and other banking organizations subject to the final rules the set of scenarios they must use to conduct their annual company-run stress tests.21 Under the stress test rules, the Board may require certain companies to use additional components in the adverse or severely adverse scenario or additional scenarios.22 For example, the Board expects to require large banking organizations with significant trading activities to include a global market shock component (described in the following sections) in their adverse and severely adverse scenarios. The Board will provide any additional components or scenario by no later than December 1 of each year.23 The Board expects that the scenarios it will require the companies to use will be the same as those the Board will use to conduct its supervisory stress tests (together, stress test scenarios). In addition, section 225.8 of the Board’s Regulation Y (capital plan rule) requires all U.S. bank holding companies with total consolidated assets of $50 billion or more to submit annual capital plans, including stress test results, to the Board to allow the Board to assess whether they have robust, forwardlooking capital planning processes and have sufficient capital to continue operations throughout times of economic and financial stress.24 Stress tests required under the stress test rules and under the capital plan rule require the Board and banking organizations to calculate pro-forma capital levels—rather than ‘‘current’’ or actual levels—over a specified planning horizon under baseline and stressful scenarios. This approach integrates on key lessons of the 2007–2009 financial crisis into the Board’s supervisory framework. During the financial crisis, investor and counterparty confidence in the capitalization of financial institutions eroded rapidly in the face of changes in the current and expected economic and financial conditions, and this loss in market confidence imperiled institutions’ ability to access funding, continue operations, serve as a credit intermediary, and meet obligations to creditors and counterparties. Importantly, such a loss in confidence occurred even when a financial institution’s capital ratios were in excess of regulatory minimums. This is because the institution’s capital ratios were perceived as lagging indicators of its financial condition, particularly when conditions were changing. The stress tests required under the stress test rules and capital plan rule are a valuable supervisory tool that provides a forwardlooking assessment of large financial institutions’ capital adequacy under 21 12 CFR 252.144(b), 12 CFR 252.154(b). The annual company-run stress tests use data as of September 30 of each calendar year. 22 12 CFR 252.144(b), 154(b). 23 Id. 24 See Capital plans, 76 FR 74631 (Dec. 1, 2011) (codified at 12 CFR 225.8). VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 hypothetical economic and financial market conditions. Currently, these stress tests primarily focus on credit risk and market risk—that is, risk of mark-to-market losses associated with firms’ trading and counterparty positions—and not on other types of risk, such as liquidity risk or operational risk unrelated to the macroeconomic environment. Pressures stemming from these sources are considered in separate supervisory exercises. No single supervisory tool, including the stress tests, can provide an assessment of an institution’s ability to withstand every potential source of risk. Selecting appropriate scenarios is an especially significant consideration, for stress tests required under the capital plan rule, which ties the review of a bank holding company’s performance under stress scenarios to its ability to make capital distributions. More severe scenarios, all other things being equal, generally translate into larger projected declines in banks’ capital. Thus, a company would need more capital today to meet its minimum capital requirements in more stressful scenarios and have the ability to continue making capital distributions, such as common dividend payments. This translation is far from mechanical; it will depend on factors that are specific to a given company, such as underwriting standards and the company’s business model, which would also greatly affect projected revenue, losses, and capital. 2. Overview and Scope This policy statement provides more detail on the characteristics of the stress test scenarios and explains the considerations and procedures that underlie the approach for formulating these scenarios. The considerations and procedures described in this policy statement apply to the Board’s stress testing framework, including to the stress tests required under 12 CFR part 252, subparts F, G, and H, as well as the Board’s capital plan rule (12 CFR 225.8).25 Although the Board does not envision that the broad approach used to develop scenarios will change from year to year, the stress test scenarios will reflect changes in the outlook for economic and financial conditions and changes to specific risks or vulnerabilities that the Board, in consultation with the other federal banking agencies, determines should be considered in the annual stress tests. The stress test scenarios should not be regarded as forecasts; rather, they are hypothetical paths of economic variables that will be used to assess the strength and resilience of the companies’ capital in various economic and financial environments. The remainder of this policy statement is organized as follows. Section 3 provides a broad description of the baseline, adverse, and severely adverse scenarios and describes the types of variables that the Board expects to include in the macro scenarios and the market shock component of the stress test scenarios applicable to firms with significant trading activity. Section 4 describes the 25 The Board may determine that modifications to the approach are appropriate, for instance, to address a broader range of risks, such as, operational risk. PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 Board’s approach for developing the macro scenarios, and section 5 describes the approach for the market shocks. Section 6 describes the relationship between the macro scenario and the market shock components. Section 7 provides a timeline for the formulation and publication of the macroeconomic assumptions and market shocks. 3. Content of the Stress Test Scenarios The Board will publish a minimum of three different scenarios, including baseline, adverse, and severely adverse conditions, for use in stress tests required in the stress test rules.26 In general, the Board anticipates that it will not issue additional scenarios. Specific circumstances or vulnerabilities that in any given year the Board determines require particular vigilance to ensure the resilience of the banking sector will be captured in either the adverse or severely adverse scenarios. A greater number of scenarios could be needed in some years—for example, because the Board identifies a large number of unrelated and uncorrelated but nonetheless significant risks. While the Board generally expects to use the same scenarios for all companies subject to the final rule, it may require a subset of companies—depending on a company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy—to include additional scenario components or additional scenarios that are designed to capture different effects of adverse events on revenue, losses, and capital. One example of such components is the market shock that applies only to companies with significant trading activity. Additional components or scenarios may also include other stress factors that may not necessarily be directly correlated to macroeconomic or financial assumptions but nevertheless can materially affect companies’ risks, such as the unexpected default of a major counterparty. Early in each stress testing cycle, the Board plans to publish the macro scenarios along with a brief narrative summary that explains how these scenarios have changed relative to the previous year. In cases where scenarios are changed to reflect particular risks and vulnerabilities, the narrative will also explain the underlying motivation for these changes. The Board also plans to release a broad description of the market shock components. 3.1 Macro Scenarios The macro scenarios will consist of the future paths of a set of economic and financial variables.27 The economic and financial variables included in the scenarios will likely comprise those included in the 2012 Comprehensive Capital Analysis and Review (CCAR).28 The domestic U.S. 26 12 CFR 252.134(b), 12 CFR 252.144(b), 12 CFR 252.154(b). 27 The future path of a variable refers to its specification over a given time period. For example, the path of unemployment can be described in percentage terms on a quarterly basis over the stress testing time horizon. 28 See Appendix III of the 2012 CCAR Instructions and Guidance (www.federalreserve.gov/newsevents/ press/bcreg/bcreg20111122d1.pdf). E:\FR\FM\23NOP1.SGM 23NOP1 emcdonald on DSK7TPTVN1PROD with PROPOSALS Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules variables provided for in the 2012 CCAR included: • Five measures of economic activity and prices: real and nominal gross domestic product (GDP) growth, the unemployment rate of the civilian non-institutional population aged 16 and over, nominal disposable personal income growth, and the Consumer Price Index (CPI) inflation rate; • Four measures of developments in equity and property markets: The Core Logic National House Price Index, the National Council for Real Estate Investment Fiduciaries Commercial Real Estate Price Index, the Dow Jones Total Stock Market Index, and the Chicago Board Options Exchange Market Volatility Index; and • Four measures of interest rates: the rate on the three-month Treasury bill, the yield on the 10-year Treasury bond, the yield on a 10-year BBB corporate security, and the interest rate associated with a conforming, conventional, fixed-rate, 30-year mortgage. The international variables provided for in the 2012 CCAR included, for the euro area, the United Kingdom, developing Asia, and Japan: • Percent change in real GDP; • Percent change in the Consumer Price Index or local equivalent; and • The U.S./foreign currency exchange rate.29 The economic variables included in the scenarios influence key items affecting banking organizations’ net income, including pre-provision net revenue and credit losses on loans and securities. Moreover, these variables exhibit fairly typical trends in adverse economic climates that can have unfavorable implications for banks’ net income and, thus, capital positions. The economic variables included in the scenario may change over time. For example, the Board may add variables to a scenario if the international footprint of companies that are subject to the stress testing rules changed notably over time such that the variables already included in the scenario no longer sufficiently capture the material risks of these companies. Alternatively, historical relationships between macroeconomic variables could change over time such that one variable (e.g., disposable personal income growth) that previously provided a good proxy for another (e.g., light vehicle sales) in modeling banks’ pre-provision net revenue or credit losses ceases to do so, resulting in the need to create a separate path, or alternative proxy, for the other variable. However, recognizing the amount of work required for companies to incorporate the scenario variables into their stress testing models, the Board expects to eliminate variables from the scenarios only in rare instances. The Board expects that the company may not use all of the variables provided in the scenario, if those variables are not appropriate to the company’s line of business, or may add additional variables, as appropriate.30 The Board expects the 29 The Board may increase the range of countries or regions included in future scenarios, as appropriate. 30 The Board expects banking organizations will ensure that the paths of such additional variables VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 companies will ensure that the paths of such additional variables are consistent with the scenarios the Board provided. For example, the companies may use, as part of their internal stress test models, local-level, such as state-level unemployment rates or citylevel house prices. While the Board does not plan to include local-level macro variables in the stress test scenarios it provides, it expects the companies to evaluate the paths of locallevel macro variables as needed for their internal models, and ensure internal consistency between these within-country variables and their aggregate, macroeconomic counterparts. The Board will provide the macro scenario component of the stress test scenarios for a period that spans a minimum of 13 quarters. The scenario horizon reflects the supervisory stress test approach that the Board plans to use. Under the stress test rules, the Board will assess the effect of different scenarios on the consolidated capital of each company over a forward-looking planning horizon of at least nine quarters. 3.2 Market Shock Component The market shock component of the stress test scenarios will only apply to companies with significant trading activity and their subsidiaries.31 The component consists of large moves in market prices and rates that would be expected to generate losses. Market shocks differ from macro scenarios in a number of ways, both in their design and application. For instance, market shocks that might typically be observed over an extended period (e.g., 6 months) are assumed to be an instantaneous event which immediately affects the market value of the companies’ trading assets and liabilities. In addition, under the stress test rules, the as-of date for market shocks will differ from the quarterend, and the Board will provide the as-of date for market shocks no later than December 1 of each year. Finally, as described in section 4, market shocks include a much larger set of risk factors than the set of economic and financial variables included in macro scenarios. Broadly, these risk factors include shocks to financial market variables that affect asset prices, such as a credit spread or the yield on a bond, and, in some cases, the value of the position itself (e.g., the market value of private equity positions). The Board envisions that the market shocks will include shocks to a broad range of risk factors that are similar in granularity to those risk factors trading companies use internally to produce profit and loss estimates, under stressful market scenarios, for all asset classes that are considered are consistent with the scenarios the Board provided. 31 Currently, companies with significant trading activity include the six bank holding companies that are subject to the market risk rule and have total consolidated assets greater than $500 billion, as reported on their FR Y–9C. The Board may also subject a state member bank subsidiary of any such bank holding company to the market shock component. The set of companies subject to the market shock component could change over time as the size, scope, and complexity of banking organization’s trading activities evolve. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 70129 trading assets, including equities, credit, interest rates, foreign exchange rates, and commodities. For example, risk factor shocks for interest rates would capture changes in the level, correlation, and volatility, by country and maturity. Risk factors will be specified separately by currency or geographic region, and include key subcategories relevant to each asset class. For example, the risk factor shocks applied to credit spreads will differ by risk category and the risk factor shocks for spot oil prices will vary by grade and type of crude oil. Examples of risk factors include, but are not limited to: • Equity indices of all developed markets, and of developing and emerging market nations to which companies with significant trading activity may have exposure, along with term structures of implied volatilities; • Cross-currency FX rates of all major and many minor currencies, along term structures of implied volatilities; • Term structures of government rates (e.g., U.S. Treasuries), interbank rates (e.g., swap rates) and other key rates (e.g., commercial paper) for all developed markets and for developing and emerging market nations to which banks may have exposure; • Term structures of implied volatilities that are key inputs to the pricing of interest rate derivatives; • Term structures of futures prices for energy products including crude oil (differentiated by country of origin), natural gas, and power; • Term structures of futures prices for metals and agricultural commodities; • ‘‘Value-drivers’’ (credit spreads or instrument prices themselves) for creditsensitive product segments including: Corporate bonds, credit default swaps, and collateralized debt obligations by risk; nonagency residential mortgage-backed securities and commercial mortgage-backed securities by risk and vintage; sovereign debt; and, municipal bonds; and • Shocks to the values of private equity positions. 4. Approach for Formulating the Macroeconomic Assumptions for Scenarios This section describes the Board’s approach for formulating macroeconomic assumptions for each scenario. The methodologies for formulating this part of each scenario differ by scenario, so these methodologies for the baseline, severely adverse, and the adverse scenarios are described separately in each of the following subsections. In general, the baseline scenario will reflect the most recently available consensus views of the macroeconomic outlook expressed by professional forecasters, government agencies, and other public-sector organizations as of the beginning of the annual stress-test cycle. The severely adverse scenario will consist of a set of economic and financial conditions that reflect the conditions of post-war U.S. recessions. The adverse scenario will consist of a set of economic and financial conditions that are more adverse than those associated with the baseline scenario but less severe than those associated with the severely adverse scenario. E:\FR\FM\23NOP1.SGM 23NOP1 70130 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules Each of these scenarios is described further in sections below as follows: Baseline (subsection 4.1), severely adverse (subsection 4.2), and adverse (subsection 4.3). emcdonald on DSK7TPTVN1PROD with PROPOSALS 4.1 Approach for Formulating Macroeconomic Assumptions in the Baseline Scenario The stress test rules define the baseline scenario as a set of conditions that affect the U.S. economy or the financial condition of a banking organization, and that reflect the consensus views of the economic and financial outlook. Projections under a baseline scenario are used to evaluate how companies would perform in more likely economic and financial conditions. The baseline serves also as a point of comparison to the severely adverse and adverse scenarios, giving some sense of how much of the company’s capital decline could be ascribed to the scenario as opposed to the company’s capital adequacy under expected conditions. The baseline scenario will be developed around a macroeconomic projection that captures the prevailing views of privatesector forecasters (e.g. Blue Chip Consensus Forecasts and the Survey of Professional Forecasters), government agencies, and other public-sector organizations (e.g., the International Monetary Fund and the Organization for Economic Co-operation and Development) near the beginning of the annual stress-test cycle. The baseline scenario is designed to represent a consensus expectation of certain economic variables over the time period of the tests and it is not the Board’s internal forecast for those economic variables. For example, the baseline path of short-term interest rates is constructed from consensus forecasts and may differ from that implied by the FOMC’s Summary of Economic Projections. For some scenario variables—such as U.S. real GDP growth, the unemployment rate, and the consumer price index—there will be a large number of different forecasts available to project the paths of these variables in the baseline scenario. For others, a more limited number of forecasts will be available. If available forecasts diverge notably, the baseline scenario will reflect an assessment of the forecast that is deemed to be most plausible. In setting the paths of variables in the baseline scenario, particular care will be taken to ensure that, together, the paths present a coherent and plausible outlook for the U.S. and global economy, given the economic climate in which they are formulated. 4.2 Approach for Formulating the Macroeconomic Assumptions in the Severely Adverse Scenario The stress test rules define a severely adverse scenario as a set of conditions that affect the U.S. economy or the financial condition of a banking organization and that overall are more severe than those associated with the adverse scenario. The banking organization will be required to publicly disclose a summary of the results of its stress test under the severely adverse scenario, and the Board intends to publicly disclose the results of its analysis of the banking VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 organization under the severely adverse scenario. After specifying the unemployment rate, the Board will specify the paths of other macroeconomic variables based on the paths of unemployment, income, and activity. However, many of these other variables have taken wildly divergent paths in previous recessions (e.g., house prices), requiring the Board to use its informed judgment in selecting appropriate paths for these variables. In general, the path for these other variables will be based on their underlying structure at the time that the scenario is designed (e.g., the relative fragility of the housing finance system). The Board considered alternative methods for scenario design of the severely adverse scenario, including a probabilistic approach. The probabilistic approach constructs a baseline forecast from a large-scale macroeconomic model and identifies a scenario that would have a specific probabilistic likelihood given the baseline forecast. The Board believes that, at this time, the recession approach is better suited for developing the severely adverse scenario than a probabilistic approach because it guarantees a recession of some specified severity. In contrast, the probabilistic approach requires the choice of an extreme tail outcome—relative to baseline—to characterize the severely adverse scenario (e.g., a 5 percent or a 1 percent. tail outcome). In practice, this choice is difficult as adverse economic outcomes are typically thought of in terms of how variables evolve in an absolute sense rather than how far away they lie in the probability space away from the baseline. In this sense, a scenario featuring a recession may be somewhat clearer and more straightforward to communicate. Finally, the probabilistic approach relies on estimates of uncertainty around the baseline scenario and such estimates are in practice modeldependent. 4.2.1 General Approach: The Recession Approach The Board intends to use a recession approach to develop the severely adverse scenario. In the recession approach, the Board will specify the future paths of variables to reflect conditions that characterize post-war U.S. recessions, generating either a typical or specific recreation of a post-war U.S. recession. The Board chose this approach because it has observed that the conditions that typically occur in recessions—such as increasing unemployment, declining asset prices, and contracting loan demand—can put significant stress on companies’ balance sheets. This stress can occur through a variety of channels, including higher loss provisions due to increased delinquencies and defaults; losses on trading positions through sharp moves in market prices; and lower bank income through reduced loan originations. For these reasons, the Board believes that the paths of economic and financial variables in the severely adverse scenario should, at a minimum, resemble the paths of those variables observed during a recession. This approach requires consideration of the type of recession to feature. All post-war U.S. recessions have not been identical: some recessions have been associated with very elevated interest rates, some have been associated with sizable asset price declines, and some have been relatively more global. The most common features of recessions, however, are increases in the unemployment rate and contractions in aggregate incomes and economic activity. For this and the following reasons, the Board intends to use the unemployment rate as the primary basis for specifying the severely adverse scenario. First, the unemployment rate is likely the most representative single summary indicator of adverse economic conditions. Second, in comparison to GDP, labor market data have traditionally featured more prominently than GDP in the set of indicators that the National Bureau of Economic Research reviews to inform its recession dates.32 Third and finally, the growth rate of potential output can cause the size of the decline in GDP to vary between recessions. While changes in the unemployment rate can also vary over time due to demographic factors, this seems to have more limited implications over time relative to changes in potential output growth. The unemployment rate used in the severely adverse scenario will reflect an unemployment rate that has been observed in severe post-war U.S. recessions, measuring severity by the absolute level of and relative increase in the unemployment rate.33 4.2.2 Setting the Unemployment Rate Under the Severely Adverse Scenario The Board anticipates that the severely adverse scenario will feature an unemployment rate that increases between 3 to 5 percentage points from its initial level over the course of 6 to 8 calendar quarters.34 The initial level will be set based on the conditions at the time that the scenario is designed. However, if a 3 to 5 percentage point increase in the unemployment rate does not raise the level of the unemployment rate to at least 10 percent—the average level to which it has increased in the most recent three severe recessions—the path of the unemployment rate in most cases will be specified so as to raise the unemployment rate to at least 10 percent. This methodology is intended to generate scenarios that feature stressful outcomes but 32 More recently, a monthly measure of GDP has been added to the list of indicators. 33 Even though all recessions feature increases in the unemployment rate and contractions in incomes and economic activity, the size of this change has varied over post-war U.S. recessions. Table 1 documents the variability in the depth of post-war U.S. recessions. Some recessions—labeled mild in Table 1—have been relatively modest with GDP edging down just slightly and the unemployment rate moving up about a percentage point. Other recessions—labeled severe in Table 1—have been much harsher with GDP dropping 33⁄4 percent and the unemployment rate moving up a total of about 4 percentage points. 34 Six to eight quarters is the average number of quarters for which a severe recession lasts plus the average number of subsequent quarters over which the unemployment rate continues to rise. The variable length of the timeframe reflects the different paths to the peak unemployment rate depending on the severity of the scenario. PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 E:\FR\FM\23NOP1.SGM 23NOP1 emcdonald on DSK7TPTVN1PROD with PROPOSALS Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules do not induce greater procyclicality in the financial system and macroeconomy. When the economy is in the early stages of a recovery, the unemployment rate in a baseline scenario generally trends downward, resulting in a larger difference between the path of the unemployment rate in the severely adverse scenario and the baseline scenario and a severely adverse scenario that is relatively more intense. Conversely, in a sustained strong expansion—when the unemployment rate may be below the level consistent with full employment—the unemployment in a baseline scenario generally trends upward, resulting in a smaller difference between the path of the unemployment rate in the severely adverse scenario and the baseline scenario and a severely adverse scenario that is relatively less intense. Historically, a 3 to 5 percentage point increase in unemployment rate is reflective of stressful conditions. As illustrated in Table 1, over the last half-century, the U.S. economy has experienced four severe post-war recessions. In all four of these recessions the unemployment rate increased 3 to 5 percentage points and in the three most recent of these recessions the unemployment rate reached a level between 9 percent and 11 percent. Under this method, if the initial unemployment rate were low—as it would be after a sustained long expansion—the unemployment rate in the scenario would increase to a level as high as what has been seen in past severe recessions. However, if the initial unemployment rate were already high—as would be the case in the early stages of a recovery—the unemployment rate would exhibit a change as large as what has been seen in past severe recessions. The Board believes that the typical increase in the unemployment rate in the severely adverse scenario would be about 4 percentage points. However, the Board would calibrate the increase in unemployment based on its views of the status of cyclical systemic risk. The Board intends to set the unemployment rate at the higher end of the range if the Board believed that cyclical systemic risks were high (as it would be after a sustained long expansion), and to the lower end of the range if cyclical systemic risks were low (as it would be in the earlier stages of a recovery). This may result in a scenario that is slightly more intense than normal if the Board believed that cyclical systemic risks were increasing in a period of robust expansion.35 Conversely, it would allow the Board to specify a scenario that is slightly less intense than normal in an environment where systemic risks appeared subdued, such as in the early stages of an expansion. However, even at the lower end of the range of unemployment-rate increases, the scenario would still feature an increase in the unemployment rate similar to what has been 35 Note, however, that the severity of the scenario would not exceed an implausible level: even at the upper end of the range of unemployment-rate increases, the path of the unemployment rate would still be consistent with severe post-war U.S. recessions. VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 seen in about half of the severe recessions of the last 50 years. As indicated previously, if a 3 to 5 percentage point increase in the unemployment rate does not raise the level of the unemployment rate to 10 percent—the average level to which it has increased in the most recent three severe recessions—the path of the unemployment rate will be specified so as to raise the unemployment rate to 10 percent. Setting a floor for the unemployment rate at 10 percent recognizes the fact that not only do cyclical systemic risks build up at financial intermediaries during robust expansions but that these risks are also easily obscured by the buoyant environment. In setting the increase in the unemployment rate, the Board would consider the extent to which analysis by economists, supervisors, and financial market experts finds cyclical systemic risks to be elevated (but difficult to be captured more precisely in one of the scenario’s other variables). In addition, the Board—in light of impending shocks to the economy and financial system—would also take into consideration the extent to which a scenario of some increased severity might be necessary for the results of the stress test and the associated supervisory actions to sustain confidence in financial institutions. While the approach to specifying the severely adverse scenario is designed to avoid adding sources of procyclicality to the financial system, it is not designed to explicitly offset any existing procyclical tendencies in the financial system. The purpose of the stress test scenarios is to make sure that the banks are properly capitalized to withstand severe economic and financial conditions, not to serve as an explicit countercyclical offset to the financial system. In developing the approach to the unemployment rate, the Board also considered a method that would increase the unemployment rate to some fairly elevated fixed level over the course of 6 to 8 quarters. This would result in scenarios being more severe in robust expansions (when the unemployment rate is low) and less severe in the early stages of a recovery (when the unemployment rate is high) and so would not result in pro-cyclicality. Depending on the initial level of the unemployment rate, this approach could lead to only a very modest increase in the unemployment rate—or even a decline. As a result, this approach—while not procyclical—could result in scenarios not featuring stressful macroeconomic outcomes. 4.2.3 Setting the Other Variables in the Severely Adverse Scenario Generally, all other variables in the severely adverse scenario will be specified to be consistent with the increase in the unemployment rate. The approach for specifying the paths of these variables in the scenario will be a combination of (1) how economic models suggest that these variables should evolve given the path of the unemployment rate, (2) how these variables have typically evolved in past U.S. recessions, and (3) and evaluation of these and other factors. Economic models—such as medium-scale macroeconomic models—should be able to PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 70131 generate plausible paths consistent with the unemployment rate for a number of scenario variables, such as real GDP growth, CPI inflation and short-term interest rates, which have relatively stable (direct or indirect) relationships with the unemployment rate (e.g., Okun’s Law, the Phillips Curve, and interest rate feedback rules). For some other variables, specifying their paths will require a case-by-case consideration. For example, declining house prices, which are an important source of stress to a bank’s balance sheet, are not a steadfast feature of recessions, and the historical relationship of house prices with the unemployment rate or any other variable that deteriorates in recessions is not strong. Simply adopting their typical path in a severe recession would likely underestimate risks stemming from the housing sector. In this case, some modified approach—in which perhaps recessions in which house prices declined were judgmentally weighted more heavily—would be appropriate. 4.2.4 Adding Salient Risks to the Severely Adverse Scenario The severely adverse scenario will be developed to reflect specific risks to the economic and financial outlook that are especially salient but would feature minimally in the scenario if the Board were only to use approaches that looked to past recessions or relied on historical relationships between variables. There are some important instances when it would be appropriate to augment the recession approach with salient risks. For example, if an asset price were especially elevated and thus potentially vulnerable to an abrupt and potentially destabilizing decline, it would be appropriate to include such a decline in the scenario even if such a large drop were not typical in a severe recession. Likewise, if economic developments abroad were particularly unfavorable, assuming a weakening in international conditions larger than what typically occurs in severe U.S. recessions would likely also be appropriate. Clearly, while the recession component of the severely adverse scenario is within some predictable range, the salient risk aspect of the scenario is far less so, and therefore, needs an annual assessment. Each year, the Board will identify the risks to the financial system and the domestic and international economic outlooks that appear more elevated than usual, using its internal analysis and supervisory information and in consultation with the FDIC and the OCC. Using the same information, the Board will then calibrate the paths of the macroeconomic and financial variables in the scenario to reflect these risks. Detecting risks that have the potential to weaken the banking sector is particularly difficult when economic conditions are buoyant, as a boom can obscure the weaknesses present in the system. In sustained robust expansions, therefore, the selection of salient risks to augment the scenario will err on the side of including risks of uncertain significance. The Board will factor in particular risks to the domestic and international macroeconomic outlook identified by its E:\FR\FM\23NOP1.SGM 23NOP1 70132 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules economists, bank supervisors, and financial market experts and make appropriate adjustments to the paths of specific economic variables. These adjustments will not be reflected in the general severity of the recession and, thus, all macroeconomic variables; rather, the adjustments will apply to a subset of variables to reflect comovements in these variables that are historically less typical. The Board plans to discuss the motivation for the adjustments that it makes to variables to highlight systemic risks in the narrative describing the scenarios.36 emcdonald on DSK7TPTVN1PROD with PROPOSALS 4.3 Approach for Formulating Macroeconomic Assumptions in the Adverse Scenario The adverse scenario can be developed in a number of different ways, and the selected approach will depend on a number of factors, including how the Board intends to use the results of the adverse scenario.37 Generally, the Board believes that the companies should consider multiple adverse scenarios for their internal capital planning purposes, and likewise, it is appropriate that the Board consider more than one adverse scenario to assess a company’s ability to withstand stress. Accordingly, the Board does not identify a single approach for specifying the adverse scenario. Rather, the adverse scenario will be formulated according to one of the possibilities listed below. The Board may vary the approach it uses for the adverse scenario each year so that the results of the scenario provide the most value to supervisors, in light of current condition of the economy and the financial services industry. The simplest method to specify the adverse scenario is to develop a less severe version of the severely adverse scenario. For example, the adverse scenario could be formulated such that the deviations of the paths of the variables relative to the baseline were simply one-half of or two-thirds of the deviations of the paths of the variables relative to the baseline in the severely adverse scenario. A priori, specifying the adverse scenario in this way may appear unlikely to provide the greatest possible informational value to supervisors—given that it is just a less severe version of the severely adverse scenario. However, to the extent that the effect of macroeconomic variables on bank loss positions and incomes are nonlinear, there could be potential value from this approach. Another method to specify the adverse scenario is to capture risks in the adverse 36 The means of effecting an adjustment to the severely adverse scenario to address salient systemic risks differs from the means used to adjust the unemployment rate. For example, in adjusting the scenario for an increased unemployment rate, the Board would modify all variables such that the future paths of the variables are similar to how these variables have moved historically. In contrast, to address salient risks, the Board may only modify a small number of variables in the scenario and, as such, their future paths in the scenario would be somewhat more atypical, albeit not implausible, given existing risks. 37 For example, in the context of CCAR, the Board currently uses the adverse scenario as one consideration in evaluating a bank holding company’s capital adequacy. VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 scenario that the Board believes should be understood better or should be monitored, but does not believe should be included in the severely adverse scenario, perhaps because these risks would render the scenario implausibly severe. For instance, the adverse scenario could feature sizable increases in oil or natural gas prices or shifts in the yield curve that are atypical in a recession. The adverse scenario might also feature less acute, but still consequential, adverse outcomes, such as a disruptive slowdown in growth from emerging-market economies. Under the Board’s stress test rules, covered companies are required to develop their own scenarios for mid-cycle company-run stress tests.38 A particular combination of risks included in these scenarios may inform the design of the adverse scenario for annual stress tests. In this same vein, another possibility would be to use modified versions of the circumstances that firms describe in their living wills as being able to cause their failures. It might also be informative to periodically use a stable adverse scenario, at least for a few consecutive years. Even if the scenario used for the stress test does not change over the credit cycle, if companies tighten and relax lending standards over the cycle, their loss rates under the adverse scenario—and indirectly the projected changes to capital— would decrease and increase, respectively. A consistent scenario would allow the direct observation of how capital fluctuates to reflect growing cyclical risks. Finally, the Board may consider specifying the adverse scenario using the probabilistic approach described in section 3.2.1 (that is, with a specified lower probability of occurring than the severely adverse scenario but a greater probability of occurring than the baseline scenario). The approach has some intuitive appeal despite its shortcomings. For example, using this approach for the adverse scenario could allow the Board to explore an alternative approach to develop stress testing scenarios and their effect on a company’s net income and capital. With the exception of cases in which the probabilistic approach is used to generate the adverse scenario, the adverse scenario would at a minimum contain a mild to moderate recession. This is because most of the value from investigating the implications of the risks described above is likely to be obtained from considering them in the context of balance sheets of covered companies and large banks that are under some stress. 5. Approach for Formulating Scenario Market Price and Rate Shocks This section discusses the approach the Board proposes to adopt for developing the stress scenario component appropriate for companies with significant trading activities. The design and specification of the stress components for trading differ from that of the macro scenarios because profits and losses from the trading are measured in mark-tomarket terms, while revenues and losses from traditional banking are generally measured using the accrual method. As noted above, 38 12 PO 00000 CFR 252.145. Frm 00010 Fmt 4702 Sfmt 4702 another critical difference is the timeevolution of the trading stress tests. The trading stress component consists of an instantaneous ‘‘shock’’ to a large number of risk factors that determine the mark-tomarket value of trading positions, while the macro scenarios supply a projected path of economic variables that affect traditional banking activities over the entire planning period. The development of the scenarios in the final rules that are detailed in this section are as follows: baseline (subsection 5.1), severely adverse (subsection 5.2), and adverse (subsection 5.3). 5.1 Approach for Formulating the Scenario for Trading Variables Under the Baseline Scenario By definition, market shocks are large, previously unanticipated moves in asset prices and rates. Because asset prices should, broadly speaking, reflect consensus opinions about the future evolution of the economy, large price movements, as envisioned in the market shock, should not occur along the baseline path. As a result, market shocks will not be included in the baseline scenario. 5.2 Approach for Formulating the Market Shock Component Under the Severely Adverse Scenario This section addresses possible approaches to designing market shocks in the severely adverse scenario, including important considerations for scenario design, possible approaches to designing scenarios, and a development strategy for implementing the preferred approach. 5.2.1 Design Considerations for Market Shocks The general market practice for stressing a trading portfolio is to specify market shocks either in terms of extreme moves in observable, broad market indicators and risk factors or directly as large changes to the mark-to-market values of financial instruments. These moves can be specified either in relative terms or absolute terms. Supplying values of risk factors after a ‘‘shock’’ is roughly equivalent to the macro scenarios, which supply values for a set of economic and financial variables; however, trading stress testing differs from macroeconomic stress testing in several critical ways. In the past, the Board used one of two approaches to specify market shocks. During SCAP and CCAR in 2011, the Board used a very general approach to market shocks and required companies to stress their trading positions using changes in market prices and rates experienced during the second half of 2008, without specifying risk factor shocks. This broad guidance resulted in inconsistency across companies both in terms of the severity and the application of shocks. In certain areas companies were permitted to use their own experience during the second half of 2008 to define shocks. This resulted in significant variation in shock severity across companies. To enhance the consistency and comparability in market shocks for CCAR in 2012, the Board provided to each trading company more than 35,000 specific risk E:\FR\FM\23NOP1.SGM 23NOP1 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules emcdonald on DSK7TPTVN1PROD with PROPOSALS factor shocks, primarily based on market moves in the second half of 2008. While the number of risk factors used in companies’ pricing and stress-testing models still typically exceed that provided in the Board’s scenarios, the greater specificity resulted in more consistency in the scenario across companies. The benefit of the comprehensiveness of risk factor shocks is at least partly offset by potential difficulty in creating shocks that are coherent and internally consistent, particularly as the framework for developing market shocks deviates from historical events. Also importantly, the ultimate losses associated with a given market shock will depend on a company’s trading positions, which can make it difficult to rank order, ex ante, the severity of the scenarios. In certain instances, market shocks that include large market moves may not be particularly stressful for a given company. Aligning the market shock with the macro scenario for consistency may result in certain companies actually benefiting from risk factor moves of larger magnitude in the market scenario if the companies are hedging against salient risks to other parts of their business. Thus, the severity of market shocks must be calibrated to take into account how a complex set of risks, such as directional risks and basis risks, interacts with each other, given the companies’ trading positions at the time of stress. For instance, a large depreciation in a foreign currency would benefit companies with net short positions in the currency while hurting those with net long positions. In addition, longer maturity positions may move differently from shorter maturity positions, adding further complexity. The instantaneous nature of market shocks and the immediate recognition of mark-tomarket losses add another element to the design of market shocks, and to determining the appropriate severity of shocks. For instance, in both SCAP and CCAR, the Board assumed that market moves that occurred over the six-month period in late 2008 would occur instantaneously. The design of the market shocks must factor in appropriate assumptions around the period of time during which market events would unfold and any associated market responses. 5.2.2 Approaches to Trading Stress Component Design For each scenario, the Board plans to use a standardized set of market shocks that apply to all companies with significant trading activity. The market shocks could be based on a single historical episode, multiple historical periods, hypothetical (but plausible) events, or some combination of historical episodes and hypothetical events (hybrid approach). Depending on the type of hypothetical events, a scenario based on such events may result in changes in risk factors that were not previously observed. In 2012 CCAR, the shocks were largely based on relative moves in asset prices and rates during the second half of 2008, but also included some additional considerations to factor in the widening of spreads for European sovereigns and financial companies based on actual observation during the latter part of 2011. VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 For the severely adverse scenario, the Board plans to use the hybrid approach to develop shocks. The hybrid approach allows the Board to maintain certain core elements of consistency in market shocks each year while providing flexibility to add hypothetical elements based on market conditions at the time of the stress tests. In addition, this approach will help ensure internal consistency in the scenario because of its basis in historical episodes; however, combining the historical episode and hypothetical events may require tweaks to ensure mutual consistency of the joint moves. In general, the hybrid approach provides considerable flexibility in developing scenarios that are relevant each year, and by introducing variations in the scenario, the approach will also reduce the ability of companies with significant trading activity to modify or shift their portfolios to minimize expected losses in the severely adverse scenario. The Board has considered a number of alternative approaches for the design of market shocks. For example, the Board explored an option of providing tailored market shocks for each trading company, using information on the companies’ portfolio gathered through ongoing supervision or other means. By specifically targeting known or potential vulnerabilities in a company’s trading position, this approach would be useful in assessing each company’s capital adequacy as it relates to the company’s idiosyncratic risk. However, the Board does not believe this approach to be well-suited for the stress tests required by regulation. Consistency and comparability are key features of annual supervisory stress tests and annual company-run stress tests required in the stress test rules. It would be difficult to use the information on the companies’ portfolio to design a common set of shocks that are universally stressful for all covered companies. As a result, this approach would be better suited to more customized, tailored stress tests that are part of the company’s internal capital planning process or to other supervisory efforts outside of the stress tests conducted under the stress test rules. 5.2.3 Development of the Trading Stress Scenario Consistent with the approach describe above, the market shock component for the severely adverse scenario will incorporate key elements of market developments during the second half of 2008, but also incorporate observations from other periods or price and rate movements in certain markets that the Board deems to be plausible though such movements may not have been observed historically. The Board also expects to rely less on market events of the second half of 2008 and more on hypothetical events or other historical episodes to develop the market shock, particularly as the bank holding company’s portfolio changes over time and a different combination of events would better capture material risk in bank holding company’s portfolio in the given year. The developments in the credit markets during the second half of 2008 were PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 70133 unprecedented, providing a reasonable basis for market shocks in the severely adverse scenario. During this period, key risk factors in virtually all asset classes experienced extremely large shocks; the collective breadth and intensity of the moves have no parallels in modern financial history and, on that basis, it seems likely that this episode will continue to be the dominant historical scenario, although experience during other historical episodes may also guide the severity of the market shock component of the severely adverse scenario. Moreover, the risk factor moves during this episode are directly consistent with the ‘‘recession’’ approach that underlies the macroeconomic assumptions. However, market shocks based only on historical events could become stale and less relevant over time as the company’s positions change, particularly if more salient features are not added each year. While the market shocks based on the second half of 2008 are of unparalleled magnitude, the shocks may become less relevant over time as the companies’ trading positions change. In addition, more recent events could highlight the companies’ vulnerability to certain market events. For example, in 2011, Eurozone credit spreads in the sovereign and financial sectors surpassed those observed during the second half of 2008, necessitating the modification of the stress scenario for the CCAR 2012 to reflect a salient source of stress to trading positions. As a result, it is important to incorporate both historical and hypothetical outcomes in market shocks for the severely adverse scenario. For the time being, the development of market shocks in the severely adverse scenario will begin with the risk factor movements in the particular historical period, such as the second half of 2008. The Board will then consider hypothetical but plausible outcomes, based on financial stability reports, supervisory information, and internal and external assessments of market risks and potential flash points. The hypothetical outcomes could originate from major geopolitical, economic, or financial market events with potentially significant impacts on market risk factors. The severity of these hypothetical moves will likely be guided by similar historical events, assumptions embedded in the companies’ internal stress tests or market participants, and other available information. For the time being, the development of market shocks in the severely adverse scenario will begin with the risk factor movements in the particular historical period, such as the second half of 2008. The Board will then develop hypothetical but plausible scenarios, based on financial stability reports, supervisory information, and internal and external assessments of market risks and potential flash points. Once broad market scenarios are agreed upon, specific risk factor groups will be targeted as the source of the trading stress. For example, a scenario involving the failure of a large, interconnected globally active financial institution could begin with a sharp increase in credit default swaps spreads and a precipitous decline in asset prices across multiple markets, as investors become more risk averse and market liquidity evaporates. E:\FR\FM\23NOP1.SGM 23NOP1 70134 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules emcdonald on DSK7TPTVN1PROD with PROPOSALS These broad market movements would be extrapolated to the granular level for all risk factors by examining transmission channels and the historical relationships between variables, though in some cases, the movement in particular risk factors may be amplified based on theoretical relationships, market observations, or the saliency to company trading books. If there is a disagreement between the risk factor movements in the historical event used in the scenario and the hypothetical event, the Board will reconcile the differences by assessing consistency with the macro scenario, a priori expectation based on financial and economic theory, and the importance of the risk factors to the trading positions of the covered companies. 5.3 Approach for Formulating the Scenario for Trading Variables Under the Adverse Scenario The market shock component included in the adverse scenario will be designed to be generally less severe than the severely adverse scenario while providing useful information to supervisors. As in the case of the macro scenario, the market shock component in the adverse scenario can be developed in a number of different ways. The adverse scenario could be differentiated from the severely adverse scenario by the absolute size of the shock, the scenario design process (e.g., historical events versus hypothetical events), or some other criteria. As discussed above, due to differences in companies’ trading positions, it can be difficult to know ex ante whether the adverse scenario or severely adverse scenario would result in greater losses for a given company. However, the Board anticipates that the adverse scenario would generally result in lower aggregate trading losses than the severely adverse scenario, particularly given the importance of creditrelated losses. The Board expects that as the market shock component of the adverse scenario may differ qualitatively from the market shock component of the severely adverse scenario, the results of adverse scenarios may be useful in identifying a particularly vulnerable area in a trading company’s positions. There are several possibilities for the adverse scenario and the Board may use a different approach each year to better explore the vulnerabilities of companies with significant trading activity. One approach is to use a scenario based on some combination of historical events. This approach is similar to the one used for 2012 CCAR, where the market shock component was largely based on the second half of 2008, but also included a number of risk factor shocks that reflected the significant widening of spreads for European sovereigns and financials in late 2011. This approach would provide some consistency each year and provide an internally consistent scenario with minimal implementation burden. Having a relatively consistent adverse scenario may be useful as it potentially serves as a benchmark against the results of the severely adverse scenario and can be compared to past stress tests. 39 12 Another approach is to have an adverse scenario that is identical to the severely adverse scenario, except that the shocks are smaller in magnitude (e.g., 100 basis points for adverse versus 200 basis points for severely adverse). This ‘‘scaling approach’’ generally fits well with an intuitive interpretation of ‘‘adverse’’ and ‘‘severely adverse.’’ Moreover, since the nature of the moves will be identical between the two classes of scenarios, there will be at least directional consistency in the risk factor inputs between scenarios. While under this approach the adverse scenario would be superficially identical to the severely adverse, the logic underlying the severely adverse scenario may not be applicable. For example, if the severely adverse scenario was based on a historical scenario, the same could not be said of the adverse scenario. It is also remains possible, although unlikely, that a scaled adverse scenario actually would result in greater losses, for some companies, than the severely adverse scenario with similar moves of greater magnitude. For example, if some companies are hedging against tail outcomes then the more extreme trading book dollar losses may not correspond to the most extreme market moves. Alternatively, the market shock component of an adverse scenario could differ substantially from the severely adverse scenario with respect to the sizes and nature of the shocks. Under this approach, the market shock component could be constructed using some combination of historical and hypothetical events, similar to the severely adverse scenario. As a result, the market shock component of the adverse scenario could be viewed more as an alternative to the severely adverse scenario and, therefore, it is possible that the adverse scenario could have larger losses for some companies than the severely adverse scenario. However, this approach would provide valuable information to supervisors, by focusing on different facets of potential vulnerabilities. Finally, the design of the adverse scenario for annual stress tests could be informed by the companies’ own market shock components used for their mid-cycle company-run stress tests.39 6. Consistency Between the Economic and Financial Variable Scenarios and the Market Price and Rate Shock Scenarios As discussed earlier, the market shock comprises a set of movements in a very large number of risk factors that are realized instantaneously. Among the risk factors specified in the market shock are several variables also specified in the macro scenarios, such as short- and long-maturity interest rates on Treasury and corporate debt, the level and volatility of U.S. stock prices, and exchange rates. Generally, the market shock scenario will be directionally consistent with the macro scenario, though the magnitude of moves in broad risk factors, such as interest rates, foreign exchange rates, and prices, may differ. Because the market shock is designed, in part, to mimic the effects of a sudden market dislocation, while the macro scenarios are designed to provide a description of the evolution of the real economy over two or more years, assumed economic conditions can move in significantly different ways. However, such differences should not be viewed as inconsistency in scenarios as long as the macro scenario and the market shock component of the scenario are directionally consistent. In effect, the market shock can simulate a market panic, during which financial asset prices move rapidly in unexpected directions, and the macroeconomic assumptions can simulate the severe recession that follows. Indeed, the pattern of a financial crisis, characterized by a short period of wild swings in asset prices followed by a prolonged period of moribund activity, and a subsequent severe recession is familiar and plausible. As discussed in section 4.2.4, the Board may feature a particularly salient risk in the macroeconomic assumptions for the severely adverse scenario, such as a fall in an elevated asset price. In such instances, the Board would also seek to reflect the same risk in one of the market shocks. For example, if the macro scenario were to feature a substantial decline in house price, it would seem plausible for the market shock to also feature a significant decline in market values of any securities that are closely tied to the housing sector or residential mortgages. In addition, as discussed in section 4.3, the Board may specify the macroeconomic assumptions in the adverse scenario in such a way as to explore risks qualitatively different from those in the severely adverse scenario. Depending on the nature and type of such risks, the Board may also seek to reflect these risks in one of the market shocks as appropriate. 7. Timeline for Scenario Publication The Board will provide a description of the macro scenarios by no later than November 15 of each year. During the period immediately preceding the publication of the scenarios, the Board will collect and consider information from academics, professional forecasters, international organizations, domestic and foreign supervisors, and other private-sector analysts that regularly conduct stress tests based on U.S. and global economic and financial scenarios, including analysts at the covered companies. In addition, the Board will consult with the FDIC and the OCC on the salient risks to be considered in the scenarios. The Board expects to conduct this process in July and August of each year and to update the scenarios based on incoming macroeconomic data releases and other information through the end of October. Currently, the Board does not plan to publish the details of the market shock component. The Board expects to provide a broad overview of the market shock component. CFR 252.145. VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 E:\FR\FM\23NOP1.SGM 23NOP1 Federal Register / Vol. 77, No. 226 / Friday, November 23, 2012 / Proposed Rules 70135 TABLE 1—CLASSIFICATION OF U.S. RECESSIONS Peak 1957Q3 1960Q2 1969Q4 1973Q4 1980Q1 1981Q3 1990Q3 2001Q1 2007Q4 Average Average Average ....................... ....................... ....................... ....................... ....................... ....................... ....................... ....................... ....................... ....................... ....................... ....................... Trough Severity 1958Q2 ........... 1961Q1 ........... 1970Q4 ........... 1975Q1 ........... 1980Q3 ........... 1982Q4 ........... 1991Q1 ........... 2001Q4 ........... 2009Q2 ........... ......................... ......................... ......................... Severe ............ Typical ............ Typical ............ Severe ............ Typical ............ Severe ............ Mild ................. Mild ................. Severe ............ Severe ............ Moderate ........ Mild ................. Duration (quarters) 4 4 5 6 3 6 3 4 7 6 4 3 (Medium) .............................. (Medium) .............................. (Medium) .............................. (Long) .................................. (Short) .................................. (Long) .................................. (Short) .................................. (Medium) .............................. (Long) .................................. .............................................. .............................................. .............................................. Decline in real GDP Change in the unemployment rate during the recession ¥3.1 ¥0.5 ¥0.1 ¥3.1 ¥2.2 ¥2.6 ¥1.3 0.7 [¥4.7] ¥3.8 ¥1.0 ¥0.3 By order of the Board of Governors of the Federal Reserve System, November 15, 2012. Margaret McCloskey Shanks, Deputy Secretary of the Board. [FR Doc. 2012–28207 Filed 11–21–12; 8:45 am] emcdonald on DSK7TPTVN1PROD with PROPOSALS BILLING CODE 6210–01–P VerDate Mar<15>2010 12:48 Nov 21, 2012 Jkt 229001 PO 00000 Frm 00013 Fmt 4702 Sfmt 9990 E:\FR\FM\23NOP1.SGM 23NOP1 3.2 1.6 2.2 3.4 1.4 3.3 0.9 1.3 4.5 3.7 1.8 1.1 Total change in the unemployment rate (incl. after the recession) 3.2 1.8 2.4 4.1 1.4 3.3 1.9 2.0 5.1 3.9 1.8 1.9
@FedFRASER