The Federal Reserve has changed the way it calculates estimated auto loan losses in the 2019 Dodd-Frank Act stress test, according to the Supervisory Stress Test Results published last week.
Specifically, the Federal Reserve enhanced the probability of default component and the loss-given default component. The report notes that these adjustments change the way certain risk drivers are captured in the model, “which reduces volatility from historical macroeconomic movements.” Meanwhile, an adjustment to newly originated accounts will “better reflect their higher credit risk compared to otherwise similar accounts,” the report added.
As a result, the changes to the auto loan model resulted in “a small increase in the overall projected loan losses” for the 18 banks tested this year — just over half of last year’s 35 participants. However, for banks with larger domestic auto portfolios, the changes “resulted in materially higher projected losses,” according to the report.
Projected losses totaled $21.1 billion across the banks tested, which includes both auto and student loan losses. The 2019 figure was based on an average taken from 2018’s result and this year’s results with the new enhancements, the report said. Stress tests in 2020 will reflect only the updated model.
Of the larger banks that participated in the stress test, Bank of America, Capital One Financial, JPMorgan Chase and Wells Fargo all have auto loan portfolios exceeding $40 billion, according to Big Wheels Auto Finance Data 2019. Other banks, such as PNC Financial Services, TD Group, and US Bancorp had auto loan portfolios ranging from $14 billion to $27 billion.
The Federal Reserve was not available for comment by press time.
