Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/114489
Authors: 
Frame, W. Scott
Gerardi, Kristopher
Willen, Paul S.
Year of Publication: 
2015
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2015-3
Abstract: 
Stress testing has recently become a critical risk management and capital planning tool for large financial institutions and their supervisors around the world. However, the one prior U.S. experience tying stress test results to capital requirements was a spectacular failure: the Office of Federal Housing Enterprise Oversight's (OFHEO) risk-based capital stress test for Fannie Mae and Freddie Mac. We study a key component of OFHEOs model - 30-year fixed-rate mortgage performance - and find two key problems. First, OFHEO had left the model specification and associated parameters static for the entire time the rule was in force. Second, the house price stress scenario was insufficiently dire. We show how each problem resulted in a significant underprediction of mortgage credit losses and associated capital needs at Fannie Mae and Freddie Mac during the housing bust.
Subjects: 
Bank supervision
stress test
model risk
residential mortgages
government-sponsored enterprises
JEL: 
G21
G23
G28
Document Type: 
Working Paper

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