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Practice paper

Risk modelling: Convergence needed, but some variances are legitimate

Brad Carr
Journal of Risk Management in Financial Institutions, 8 (4), 323-331 (2015)
https://doi.org/10.69554/TICP3732

Abstract

The level of variance between banks’ internal RWA models has generated concern, although the sources and effects of such variance are not always understood. An extensive review of modelling practices by the IIF RWA Task Force in 2014 has confirmed that, while variances are indeed too large, some components of this reflect underlying differences between banks’ portfolios and risk management policies and practices, among other legitimate factors. In this sense, some variance can have a positive effect, as capturing the inherent differences between banks helps strengthen risk management, making banks more attuned to the real risks and incentivising them to improve their capabilities. Some harmonisation of modelling practices is necessary to help restore RWA credibility, necessitating an extensive process of sifting through which model factors represent an intrinsic difference between banks or jurisdictions and which reflect more common factors. This can help enable the continued improvement of models, and the vital role of risk-sensitive metrics at the core of banking.

Keywords: RWA; capital; modelling; variance; harmonisation; risk-sensitivity

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Author's Biography

Brad Carr joined the Institute of International Finance in May 2014 from National Australia Bank, with 15 years’ experience in credit, active portfolio management and relationship management, including managing credit derivatives and pricing models. Brad holds a bachelor’s degree in economics from the University of Western Australia and a masters in science and technology commercialisation from the University of Adelaide, and is an accredited Certified Basel III Professional with the Basel III Compliance Professionals Association.

Citation

Carr, Brad (2015, October 1). Risk modelling: Convergence needed, but some variances are legitimate. In the Journal of Risk Management in Financial Institutions, Volume 8, Issue 4. https://doi.org/10.69554/TICP3732.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 8 / Issue 4
© Henry Stewart
Publications LLP

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