black swan

All posts tagged black swan

The Ugliness of Beautiful Models

Posted by Karamjeet Paul on September 25, 2014
Posted in: Capital, Extreme-Tail Risk. Tagged: , , , , , , , , . Leave a comment

A couple of weeks ago, during the New York Fashion Week, seeing glamorous models at the Lincoln Center Plaza brought to mind the beauty of models. Unfortunately, the conversation at a meeting soon after actually highlighted the ugliness of models.

At that meeting, frustrations were evident that regulators are always complaining that, despite the beauty of their sophistication, bank models underestimate the capital regulators believe is needed to support risk at financial institutions, and thus can lead to ugliness in times of financial crises similar to the crash of 2008.

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What Stress Testing Is Not

Posted by Karamjeet Paul on September 2, 2014
Posted in: Capital, Extreme-Tail Risk, Regulations. Tagged: , , , , , , , , . 1 Comment

By Karamjeet Paul (Published by Forbes September 22, 2014)

With banks getting ready for the year-end regulatory stress testing, it is worth looking at what stress testing is and, more importantly, what it is not.

Typically, stress-testing models simulate adverse conditions to evaluate if a system/structure can survive abnormal circumstances. For banks, the objective of regulatory stress testing, also known as Comprehensive Capital Analysis and Review (CCAR), is “to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress …”

Passing CCAR is important as low grades create a negative perception and accompany regulatory restrictions. However, passing stress tests can also create a false sense of security because of what it is not.

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