FSA publishes modelling occasional paper

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LONDON – The UK Financial Services Authority (FSA) has published its second occasional paper on operational risk modelling issues. The paper set out the FSA’s views on some of the issues that firms face when modelling operational risk for Pillar I or Pillar II purposes. It focuses on three areas: simulation techniques; portability of conclusions; and the use of off-the-shelf models.

The paper categorically states that neither the FSA nor any other regulator has pre-approved any off-the-shelf model or system because they are usually built on the basis of an average firm, so the model’s relevance is diluted as the firm evolves and its risk profile changes. The FSA is keen to stress that, although an imported model is mathematically sound, care should be taken to ensure that its inputs and outputs are compatible with the manner in which the firm manages risk.

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