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Strategic Risk Modelling by Banks: Evidence from Inside the Black Box

Author

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  • Ouarda Merrouche

    (UPN SEGMI - Université Paris Nanterre - UFR Sciences économiques, gestion, mathématiques, informatique - UPN - Université Paris Nanterre)

  • Mike Mariathasan
  • Elisaveta Sizova

Abstract

Regulators condition bank capital on risk but struggle to measure risk accurately. Capital requirements thus rely on inputs from banks' internal risk models and banks have discretion over modeling choices. Using novel hand-collected data we find systematic differences in reported risk for the chosen simulation method, holding period and historical data size. Hence, modeling choices can be a significant channel of underreporting of risk. Consistent with this presumption we find that less-capitalized banks tend to choose less conservative methods. Moreover, banks using a softer simulation method display higher actual market risk while reporting lower market risk to the regulator.

Suggested Citation

  • Ouarda Merrouche & Mike Mariathasan & Elisaveta Sizova, 2026. "Strategic Risk Modelling by Banks: Evidence from Inside the Black Box," Post-Print hal-05622822, HAL.
    • Handle: RePEc:hal:journl:hal-05622822
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