Estimating the Impact of Model Limitations in Capital Stress Testing

Brian A. Todd (), Douglas T. Gardner and Valeriu (Adi) Omer
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Brian A. Todd: Bank of the West
Douglas T. Gardner: Bank of the West
Valeriu (Adi) Omer: Bank of the West

A chapter in Commercial Banking Risk Management, 2017, pp 231-249 from Palgrave Macmillan

Abstract: 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).

Keywords: Model Risk; Forecast Error; Capital Ratio; Forecast Uncertainty; Residual Model Error (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-59442-6_11

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DOI: 10.1057/978-1-137-59442-6_11

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