Project:Sandbox

Economic Scenarios - Derived Market (M501204)

1 Required Action Item (RAI) 602650 Overview

1.1 Description

In some of the scenarios under TDA, TDH, TDM and HP CESA several anomalies such as multiple

crossovers, kinks, and unintuituve ordering of scenarios are observed. The rationale provided by

the developers during the validation needs to be documented in the whitepaper. In addition, the

developers need to provide the results for TDG scenarios, which is supposed to replace the TDM

scenario over time.

1.1.1 Deliverable Description

1. Document the rationale provided for explaining the anomalies such as multiple crossovers,

kinks, and counter-intuitive ordering of scenarios such as TDA, TDH, TDM and HP CESA.

2. Provide the forecast results for the newly developed TDG scenario, which is supposed to

replace TDM scenario in the future.

1.2 Severity

Medium

1.3 Severity Rationale

It impacts only the SPGSCITR submodel, and GRA communicated that its downstream use is

limited to only 7 scenarios (TD BASE, TDA D5, TDA U1, TDX SS, HP CESA, HP CEA, HP D5).

The RAI requires the developer to document the analysis behind the anomalies observed in some

of the scenarios along with the results for a new scenario. All outputs are closely monitored as part

of the heightened ongoing monitoring activities since the 2020 COVID impacts, and overlays are

applied if needed. As a result, the model risk exposure is mitigated by the controls currently in

place.

Model Documentation Bank of America: Proprietary Page 2 of 15

Economic Scenarios - Derived Market (M501204)

2 Response to RAI 602650

Scenario crossings in SPGSCITR have not been observed since the beginning of 202301 cycle, which

represents the �rst cycle that the sub-model entered production and also the cycle documented in

the MDR submitted on August 4, 2023. As communicated during the validation, the crossings

were an artifact of the crossing in the main upstream driver, BRENT. Moreover, the crossings were

seen only in "Upside" or "Up" scenarios, while the "Downside" or "Down" scenarios behaved as

expected. A detailed response to the two deliverables assigned in 1.1.1 can be found below.

2.1 Deliverable on scenario crossings

During the validation process, there has been communication about the crossings in certain scenarios

due to the upstream driver, BRENT, which in turn exhibited crossings due to its upstream driver

from the Core Model (501200), RGDP. This also created an unintuitive rank order of the scenarios.

However, since then, GSG together with MRM decided on a comprehensive list of scenarios to

be produced and submitted for validation. TDH and TDM scenarios are no longer produced and

therefore they have been removed from the submission list. The response to this RAI will include

an analysis on the TDA scenarios and TDX. From the TDX scenarios, only TDX SS and TDX SF

are in production.

Refer to Tables 1 and 2 for a list of scenarios and de�nitions.

Model Documentation Bank of America: Proprietary Page 3 of 15

Economic Scenarios - Derived Market (M501204)

Scenario

Code

Scenario

Name

Purpose Scenario Description Include

Scenario

Results

TD BASE BAC Baseline Internal Baseline Scenario,

based on Consensus and Market

Implied when available, other-

wise use models for Baseline

Corporate Planning forecast. Yes

TDA D1 TD Down 1 -

All Directions:

slow down

Downside scenarios, used to cus-

tomize the CECL scenarios and

ESPE internal stress scenarios

like the HP D5 (BACA)

The �rst True Distribution TD down scenario

extracted from model simulations generally fea-

turing growth slow down where all risk directions

are shocked.

No/Optional

TDA D2 TD Down 2 -

All Directions:

slow down

Downside scenarios, used to cus-

tomize the CECL scenarios and

ESPE internal stress scenarios

like the HP D5 (BACA)

The second True Distribution TD down scenario

extracted from model simulations generally fea-

turing growth slow down where all risk directions

are shocked.

No/Optional

TDA D3 TD Down 3 -

All Directions:

growth reces-

sion

Downside scenarios, used to cus-

tomize the CECL scenarios and

ESPE internal stress scenarios

like the HP D5 (BACA)

The third True Distribution TD down scenario

extracted from model simulations generally fea-

turing a growth recession where all risk directions

are shocked.

Yes

TDA D4 TD Down 4 -

All Directions:

moderate re-

cession

Downside scenarios, used to cus-

tomize the CECL scenarios and

ESPE internal stress scenarios

like the HP D5 (BACA)

The fourth True Distribution TD down scenario

extracted from model simulations generally fea-

turing a moderate recession where all risk direc-

tions are shocked.

No/Optional

TDA D5 TD Down 5

- All Direc-

tions: severe

recession

Downside scenarios, used to cus-

tomize the CECL scenarios and

ESPE internal stress scenarios

like the HP D5 (BACA)

The �fth True Distribution TD down scenario

extracted from model simulations generally fea-

turing a severe recession where all risk directions

are shocked.

Yes

TDA U1 TD Up 1 - All

Directions:

stronger

growth

Upside scenarios, used to cus-

tomize the CECL scenarios

The �rst True Distribution TD up scenario ex-

tracted from model simulations generally featur-

ing stronger growth where all risk directions are

shocked.

No/Optional

TDA U2 TD Up 2: All

directions:

moderate

growth and

in

ation

Upside scenarios, used to cus-

tomize the CECL scenarios

Second true distribution TD up scenario ex-

tracted from model simulations generally featur-

ing moderate growth and in

ation where all risk

directions are shocked.

No/Optional

TDA U3 TD Up 3 -

All Directions:

strong growth

and rising in-

ation

Upside scenarios, used to cus-

tomize the CECL scenarios

The third True Distribution TD up scenario ex-

tracted from model simulations generally featur-

ing strong growth and rising in

ation where all

risk directions are shocked.

Yes

TDA U4 TD Up 4 -

All Direc-

tions: strong

in

ationary

expansion

Upside scenarios, used to cus-

tomize the CECL scenarios

The fourth True Distribution TD up scenario ex-

tracted from model simulations generally featur-

ing a strong in

ationary expansion where all risk

directions are shocked.

No/Optional

TDA U5 TD Up 5 - All

Directions:

extreme in-

ationary

growth

Upside scenarios, used to cus-

tomize the CECL scenarios

The �fth True Distribution TD up scenario ex-

tracted from model simulations generally featur-

ing extreme in

ationary growth where all risk di-

rections are shocked.

Yes

TDX SS TD Extreme

Stress Sce-

nario - All

Directions

Most severe model-based stress

scenario, used to customize

ESPE HP BAC (BACSA) sce-

nario

The most severe True Distribution stress scenario

extracted from the model simulations where all

risk directions are shocked.

Yes

TDX SF TD Stag

a-

tion: Macro

direction slow

down, in

a-

tion direction

up

Stag

ation scenario (which in

turn is used to customize the

CRISA's persistent in

ation sce-

nario (HP CEPI))

Tail event, stag

ation scenario extracted from

model simulations where growth slows and in-

ation peaks.

Yes

Table 1: Key TD scenarios

Model Documentation Bank of America: Proprietary Page 4 of 15

Economic Scenarios - Derived Market (M501204)

Scenario

Code

Scenario

Name

Purpose Scenario Description Include

Scenario

Results

HP BAC BAC Severely

Adverse

Internal Severely Adverse:

BACSA

Supports BAC's capital planning process; Cus-

tomized to stress BAC-speci�c risks and sensitiv-

ities; Based on an assessment of prioritized risks

captured in the Enterprise Risk Inventory.

Yes

HP D5 BAC Adverse Internal Adverse: BACA Support Risk Appetite limit monitoring. Prior

to 4Q22, the scenario was developed through a

probabilistic approach, with severity expressed

as a statistical variance from the BAC Base-

line macro-economic variable assumptions. Since

4Q22 BAC-A Scenario is developed using an

unemployment-centric approach, whereby key

variable paths are speci�ed in combination of:

(1) direct or indirect relationship to the change

in unemployment rate; (2) past moderate U.S. re-

cessions; and/or (3) evaluation of these and other

risk factors

Yes

HP BASE Supervisory

Baseline

FRB Supervisory Baseline:

SUPBL

Regulatory scenario; Blue Chip Economic Indi-

cators Survey; Re

ects the consensus view of the

economy over the planning horizon

Yes

HP SAV Supervisory

Severely

Adverse

FRB Supervisory Severely Ad-

verse: SUPSA

Regulatory scenario characterized by severe

global recession and features periods of height-

ened stress in corporate loan and commercial real

estate markets

Yes

HP EBAB EBA Baseline Largely prescribed by EBA for a

smaller subset of variables rele-

vant to legal entity

EBA Baseline Scenario Yes

HP EBAS EBA Stress Largely prescribed by EBA for a

smaller subset of variables rele-

vant to legal entity

EBA Stress Scenario Yes

HP CEA CECL Ad-

verse

Customized from BACA for

CECL

CECL Adverse scenario which re

ects a moder-

ate recession and is leveraged for CECL purposes

No

HP CESA BAC Severely

Adverse -

Customiza-

tion

Customized from BACSA for

CECL

CECL Severely Adverse scenario customized

from prior quarter BAC SA.

No

HP CEPI CECL Persis-

tent In

ation

Customized from TDX SF for

CECL

CECL ad-hoc scenario with continued high in

a-

tion and Fed Funds rates remaining signi�cantly

elevated through an economic contraction with

more meaningful declines in asset values than the

CEA scenario

No

Table 2: Key Regulatory and Hypothetical scenarios

TDA scenarios remain our main theoretical scenarios and explanations on the crossings are

provided below. For our hypothetical scenarios that start with "HP" since they are customized

by our stakeholders, they can frequently cross other scenarios, especially if they are requested and

customized by di�erent stakeholders, Enterprise Scenario Planning and Execution (ESPE) or Credit

Risk Information, Strategy and Allowance (CRISA).

Moreover, the scenario crossing in upstream variables is a known issue and it triggered an RAI

(602659) on the Core Model, which is currently in progress. If crossings are seen in the upstream

models, it is natural that they will propagate throughout the model system to downstream variables.

In order to quickly remediate some of the severity issues, the model developer for the Core Model

submitted a Limited Changed (603563) on November 30, 2022. This has been mostly impacting

the unemployment rate model, however, due to the structure of the Core model, it will also a�ect

other variables to a lesser extent. Beginning in 202301, the SPGSCITR model has not displayed

Model Documentation Bank of America: Proprietary Page 5 of 15

Economic Scenarios - Derived Market (M501204)

any crossings or unintuitive rank order.

2.1.1 Scenario crossings

The SPGSCITR sub-model was submitted for validation for the 202210 cycle. For this cycle,

multiple TDA scenarios crossings and incorrect rank order have been seen as a product of upstream

variables. Namely, RGDP is one of the main drivers for Brent Oil and any crossings in RGDP would

result in crossings in BRENT. The crossings in the upstream variables triggered an RAI on the

Core model (501200), RAI 602659 - "Investigation for causes of crossing severity levels in variable

projections". However, SPGSCITR sub-model entered production in January 202301 cycle and

since, all of the above mentioned crossings and rank order of the scenarios have been as expected.

Moreover, the new MDR submission (S603403) on August 4, 2023, documents the SPGSCITR

sub-model for the 202301.2 cycle and therefore all aforementioned issues are no longer observed as

a possible concern. A thorough investigation for 202210 cycle is performed below, followed by an

analysis of the seven cycles since the variable has been put in production.

2.1.1.1 202210 Cycle Multiple crossings in SPGSCITR for the "Up" scenarios are caused by

crossings in the upstream variable, BRENT, which is in turn driven by RGDP as shown in Figures

1 - 3.

Figure 1: SPGSICTR 202210

Model Documentation Bank of America: Proprietary Page 6 of 15

Economic Scenarios - Derived Market (M501204)

Figure 2: BRENT 202210

Figure 3: RGDP 202210

Furthermore, one additional BRENT driver, the short-run real interest rate spread, expressed

as the di�erence between 3-month Treasury Bill and year-over-year (YY) Headline Consumer Price

Index (UST 3M - YY HCPI), although it displays no crossings, the very sharp increase for the �rst

3 quarters in TDA U5, TDA U4, and TDA U3, coupled with the negative coe�cient sign pushed

the "Up" scenarios closer toward baseline, exacerbating the crossings and rank order misalignment.

Model Documentation Bank of America: Proprietary Page 7 of 15

Economic Scenarios - Derived Market (M501204)

Figure 4 shows the ordering and magnitude in the interest rate spread. In 202301 cycle, the

magnitude is not as elevated, as seen in Figure 5.

Figure 4: RGDP 202210

Figure 5: RGDP 202210

All other model drivers, VIX, AUD, and the inverse of JPY behave as expected and are depicted

in Figures 6 - 8. Although crossings are not desirable, in this instance, they have occurred for a

limited period of time and as observed by MRM, they do not manifest in the "Down" scenarios.

Model Documentation Bank of America: Proprietary Page 8 of 15

Economic Scenarios - Derived Market (M501204)

Figure 6: VIX 202210

Figure 7: AUD 202210

Model Documentation Bank of America: Proprietary Page 9 of 15

Economic Scenarios - Derived Market (M501204)

Figure 8: Inverse of JPY 202210

2.1.1.2 202301 CCAR cycle until current Since the beginning of 2023, starting with 202301

cycle onward, there were no more crossings or unintuitive scenario rank order as shown in Figures

9 - 15. The reason for this change is twofold. Firstly, the Core model simulation methodology

changed to increase severity for some of the core variables. Secondly, for the 202301 cycle, BRENT

manifests less movement and the scenarios are properly ordered. However, there is more movement

in the driver currencies, AUD and CAD, which is in line with the lower in

ation and higher growth

that predominated 2023. The model developer for Core model (501200) and GSG team are working

on �nding a permanent solution to avoid crossings in future production, which will be addressed as

part as the RAI 602659 for 501200 model. Although TDA crossings are to be avoided, if they occur

in the upstream variables, the impact will propagate through the downstream variables as well.

Model Documentation Bank of America: Proprietary Page 10 of 15

Economic Scenarios - Derived Market (M501204)

Figure 9: SPGSICTR 202301

Figure 10: SPGSICTR 202302

Model Documentation Bank of America: Proprietary Page 11 of 15

Economic Scenarios - Derived Market (M501204)

Figure 11: SPGSICTR 202303

Figure 12: SPGSICTR 202304

Model Documentation Bank of America: Proprietary Page 12 of 15

Economic Scenarios - Derived Market (M501204)

Figure 13: SPGSICTR 202305

Figure 14: SPGSICTR 202306

Model Documentation Bank of America: Proprietary Page 13 of 15

Economic Scenarios - Derived Market (M501204)

Figure 15: SPGSICTR 202307

In the same manner as for the TDA U scenarios, TDX SF kinks are driven by the upstream

driver, BRENT, which in turn was driven by RGDP, as shown in Figure 16.

Figure 16: SPGSICTR vs. BRENT for the TDX SF Scenario 202210

Model Documentation Bank of America: Proprietary Page 14 of 15

Economic Scenarios - Derived Market (M501204)

Figure 17: RGDP TDX SF Scenario 202210

We have investigated the stability of the coe�cients across 202210 and 202301 cycles and no

material changes were seen as shown in Table 3. This furthermore con�rms that the observed

crossings are indeed due to upstream variables and not coe�cient instability.

Coe�cients 202210 202301 Di�erences

Intercept -0.0017 -0.0001 0.0015

DLN BRENT 0.5022 0.5088 0.0065

D VIX -0.0028 -0.0027 0.0001

DLN AUD 0.7164 0.7392 0.0228

DLN P JPY -0.2937 -0.3108 -0.0171

Table 3: SPGSCITR model coe�cients 202210 vs. 202301

2.2 Deliverable on TDG scenarios

The TDG scenarios are not in production or used for any purposes, therefore, they cannot be

provided for review. If in the future, it would be decided that these scenarios would play any role

in the production and distribution to the downstream users, the GSG team will include them in

the submission of outputs.

Model Documentation Bank of America: Proprietary Page 15 of 15