Strategic Risk Modelling by Banks: Evidence from Inside the Black Box

Ouarda Merrouche (), Mike Mariathasan and Elisaveta Sizova
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Ouarda Merrouche: UPN SEGMI - Université Paris Nanterre - UFR Sciences économiques, gestion, mathématiques, informatique - UPN - Université Paris Nanterre

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Abstract: Regulators condition bank capital on risk but struggle to measure risk accurately. Capital requirements thus rely on inputs from banks' internal risk models and banks have discretion over modeling choices. Using novel hand-collected data we find systematic differences in reported risk for the chosen simulation method, holding period and historical data size. Hence, modeling choices can be a significant channel of underreporting of risk. Consistent with this presumption we find that less-capitalized banks tend to choose less conservative methods. Moreover, banks using a softer simulation method display higher actual market risk while reporting lower market risk to the regulator.

Keywords: Financial Intermediaries; Capital Regulation; Value-at-Risk; Market Risk; Strategic Modeling (search for similar items in EconPapers)
Date: 2026
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Published in The review of corporate finance studies, In press

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05622822

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