Model Risk and the Control of Eigenmodels by the Supervisors

Abstract

Following the 1996 Market Risk Amendment by the Basle Committee on Banking Supervision, and the adoption of VAR as a measurement of market exposure, the examination, control and approval of financial reporting based on internal bank models (eigenmodels) has become a core activity of supervisors. This task is increasingly demanding owing to the evolving complexity of financial models, and the need to judge the assumptions employed in eigenmodels and the way these are used.