Difference between revisions of "BCBS JOINT25"
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<h3>Key Findings</h3> | <h3>Key Findings</h3> | ||
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− | <li>Despite recent advances, models currently in use have not adapted to support all the functions and decisions for which they are now used. Firms using these models may not fully understand the risks they face, including tail events.</li> | + | <li>Despite recent advances, models currently in use have not adapted to support all the functions and decisions for which they are now used. Firms using these models may not fully understand the risks they face, including [[Tail Risk | tail events]].</li> |
<li>While some firms are addressing these issues - particularly the treatment of tail events - others are not.</li> | <li>While some firms are addressing these issues - particularly the treatment of tail events - others are not.</li> | ||
<li>Firms face a range of practical challenges when modelling risk aggregation. These include managing the volume and quality of data and communicating results in a meaningful way. Despite these challenges, the Joint Forum found that firms have little or no appetite for fundamentally reassessing or reviewing how risk aggregation processes are managed.</li> | <li>Firms face a range of practical challenges when modelling risk aggregation. These include managing the volume and quality of data and communicating results in a meaningful way. Despite these challenges, the Joint Forum found that firms have little or no appetite for fundamentally reassessing or reviewing how risk aggregation processes are managed.</li> |
Latest revision as of 13:08, 16 April 2021
Contents
Definition
BCBS JOINT25 is a document published by the Basel Committee on Banking Supervision on October 2010 in the Risk Management category.
Title
Developments in Modelling Risk Aggregation.
Abstract
The report suggests improvements to the current modelling techniques used by complex firms to aggregate risks. It also examines supervisory approaches to firms' use of risk aggregation models, particularly in light of the global financial crisis.
Mr Tony D'Aloisio, Chairman of the Joint Forum and Chairman of the Australian Securities and Investments Commission, said "This report is essential reading for firms considering ways to make more effective use of risk aggregation methods, and for supervisors wanting to understand firms' use of risk aggregation models to help identify shortcomings in a firm's approach."
Key Findings
- Despite recent advances, models currently in use have not adapted to support all the functions and decisions for which they are now used. Firms using these models may not fully understand the risks they face, including tail events.
- While some firms are addressing these issues - particularly the treatment of tail events - others are not.
- Firms face a range of practical challenges when modelling risk aggregation. These include managing the volume and quality of data and communicating results in a meaningful way. Despite these challenges, the Joint Forum found that firms have little or no appetite for fundamentally reassessing or reviewing how risk aggregation processes are managed.
- In carrying out their responsibilities, supervisors generally do not rely on aggregation models currently used by firms as they are generally considered a "work in progress" with best practices yet to be established. Substantial improvements and refinements in methods- particularly in aggregating across risk classes - are needed before supervisors are likely to be comfortable in placing reliance on these models for supervisory purposes.
Key Recommendations
- Firms should improve their risk aggregation techniques, for example by reassessing and reorienting models according to their purpose and function. Such improvements will assist firms to better comprehend the risks they face.
- Firms using models for risk identification and monitoring purposes should ensure they are sufficiently sensitive, granular, flexible and clear. Models used for capital adequacy and solvency purposes should be improved to better reflect tail events.
- Supervisors should recognise the risks posed by continued use of current aggregation processes and methods. Supervisors are urged to communicate their concerns to firms while highlighting the benefits of appropriately calibrated and well-functioning aggregation models for improved decision making and risk management. Supervisors should work with firms to implement these improvements.
Document Profile
- Publication Date: October 2010
- Publication Type: Other
- Publication Status: Current
- Publication Category: Risk Management
- Number of Pages: 113
- Keywords: Financial Regulation, Operational Risk, Credit Risk Models, Governance, Credit Risk Modelling
See Also
Disclaimers
For definitive information on regulatory matters always consult primary sources, especially where it concerns legally binding rules and regulations.
The above regulatory document abstract is quoted verbatim in this Open Risk Manual entry and provided free of charge for the convenience of all internet users. There is no explicit or implicit endorsement of this web service by the Bank of International Settlements. The copyright of the included material rests with the original authors (Links to the original texts are duly provided).