Backtesting Risk Models

Abstract

One of the most important changes in the financial industry since the 2008 market events is the change in stance by governments, from a “loose” regulatory environment to a much more hands-on approach In particular, national regulators have substantially increased their scrutiny over the models used by banks to calculate risk and capital Also, the amount of capital that banks need to hold against their balance sheet has increased substantially and, hence, the cost-benefit balance of investing in good accurate models has shifted importantly towards better models.