Economic Capital Foundations
Stress Testing Foundations
Counterparty Credit Risk
Interest Rate Risk in the Banking Book
13.1 RECAP OF THE BOOK
We have developed a generalised risk modelling framework for use in firm-wide economic capital, stress testing and liquidity risk modelling. We described models for all risk types in producing portfolio models (Parts II and III) for application in the balance sheet projection methodology presented in Chapter 12. In describing this generalised risk modelling framework, we also introduced the following features.
Shared economic dependencies: the application of a consistent economic scenario generator (in top-down approaches) or path-consistent risk factor models (in bottom-up approaches) enables firm-wide risk modelling to use a shared factor approach (Section 3.4.3). This ensures that all risk models are presented with the same economic scenarios on which to forecast losses. It further ensures that consistent losses and cashflows are forecasted, so that aggregation on a scenario-by-scenario basis can be performed by the simple addition of losses across scenarios.
Proper accounting for dependencies: shared factors are not the only source of dependencies. Section 3.4.3 describes other forms of dependency. Operational risk (Chapter 8)