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On the Treatment of Model Risk in the Internal Capital Adequacy Assessment Process

Author

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  • Tilo Bellof
  • Carsten S. Wehn

Abstract

Currently, model risk related to risk models is subject of intense discussions between regulators and the banking industry. With regard to increasing requirements on the one hand and yet no standardized approach by banks to handle model risk on the other hand, this article draws the area of conflict by providing a comprehensive definition and delimitation of model risks and the related regulatory requirements. The main focus lies in the systematic treatment of model risk in the context of internal governance and internal capital adequacy, its appropriate assessment or quantification as well as an adequate procedural handling of model risk. The article shows the main different approaches of how to incorporate model risk in the internal risk management and discusses the respective pros and cons. JEL classification numbers: C02, G21, G24Keywords: Model uncertainty, parameter uncertainty, estimation errors, model risk, internal governance, internal capital adequacy, risk capital

Suggested Citation

  • Tilo Bellof & Carsten S. Wehn, 2018. "On the Treatment of Model Risk in the Internal Capital Adequacy Assessment Process," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(4), pages 1-1.
    • Handle: RePEc:spt:apfiba:v:8:y:2018:i:4:f:8_4_1
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    Citations

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    Cited by:

    1. Sophia Velez & Michael Neubert & Daphne Halkias, 2020. "Banking Finance Experts Consensus on Compliance in US Bank Holding Companies: An e-Delphi Study," JRFM, MDPI, vol. 13(2), pages 1-14, February.
    2. Sophia Beckett Velez, 2021. "Idiosyncratic Viral Loss Theory: Systemic Operational Losses in Banks," JRFM, MDPI, vol. 14(2), pages 1-13, February.

    More about this item

    Keywords

    model uncertainty; parameter uncertainty; estimation errors; model risk; internal governance; internal capital adequacy; risk capital;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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