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Estimating the Impact of Model Limitations in Capital Stress Testing

In: Commercial Banking Risk Management

Author

Listed:
  • Brian A. Todd

    (Bank of the West)

  • Douglas T. Gardner

    (Bank of the West
    BNP Paribas)

  • Valeriu (Adi) Omer

    (Bank of the West)

Abstract

This chapter introduces a model limitation buffer for use in capital stress testing. Consistent with regulatory guidance, the model limitation buffer quantifies the impact of uncertainties and limitations on projections of capital needs under stress. The process described here is an essentially “bottom-up” approach to the model limitations buffer where forecast limitations are evaluated for individual models or for the smallest collection of models required to describe a single portfolio. The bottom-up approach is consistent with regulatory expectations (FRS, CCAR 2015 Summary Introductions and Guidance, 2014) and is evolving into the preferred industry practice (PwC. Model Uncertainty/Model Risk Quantification Industry Survey. PwC Survey Results, 2015).

Suggested Citation

  • Brian A. Todd & Douglas T. Gardner & Valeriu (Adi) Omer, 2017. "Estimating the Impact of Model Limitations in Capital Stress Testing," Palgrave Macmillan Books, in: Weidong Tian (ed.), Commercial Banking Risk Management, pages 231-249, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-59442-6_11
    DOI: 10.1057/978-1-137-59442-6_11
    as

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