Risk Modeling Limitations, Capital Procyclicality and the role of Stress Testing

Monday 26 October 2009

Course leader: Evan Sekeris, Senior Economist, FEDERAL RESERVE BANK OF RICHMOND

08:30 Registration and coffee

09:00 Modeling limitations and capital pro-cyclicality

• Pro-cyclicality and the regulatory framework, can Basel 2 be blamed?
• Overly optimistic modeling assumptions in good economic environments lead to unrealistic capital numbers
• Shortsightedness of risk models.
• Can pro-cyclicality be dampened?

10:30 Morning break

11:00 Distributional choices

• Thin tailed distributions – often criticized, still frequently used
• Historical simulation – history repeats itself… but not frequently enough
• Fat-tailed distribution – a panacea?
• Limits of modeling - a look at higher moments (skewness and kurtosis) shows that even distributions thought of as adequate might not be the answer

12:30 Lunch

13:30 Stress Testing

• Types of stress testing: stressing parameters, stressing the model itself
• Designing stress tests that are true “stresses” but still realistic
• Integrating stress testing in the traditional risk modeling framework.
• Scenario analysis and its role in stress testing

15:00 Afternoon break

15:30 Extreme Stress Testing - Breaking the model

• Stressing the parameters is not sufficient, need to question the model
• Overreliance on models – how modelers forgot to question their work and oversold their results
• Is VaR sufficient? Do we need better tools?

17:00 End of seminar

About the course leader:

Evan Sekeris is an Assistant Vice President in the Bank Supervision and Regulation Department at the Federal Reserve Bank of Richmond. As head of the Modeling and Analysis Unit he is responsible for the supervision of risk models at large banking institutions and for assessing their compliance with regulatory requirements, in particular the Basel II Capital Accord. Evan's research focuses on information issues in asset pricing and on operational risk modeling. Prior to holding this position, Evan was a Financial Economist in the Quantitative Analysis Unit at the Federal Reserve Bank of Boston.