Black box blues: Fed starts model validation row

"They all fall short," says one expert, as banks try to vet vendor models

Federal Reserve

Models are complex things, but they have recently become the subject of a simple argument. Under pressure from the Federal Reserve Board, US banks are asking model vendors to open up their black boxes – and the vendors, to a greater or lesser extent, are refusing. It's a dispute that, until now, has played out in private, but banks are becoming increasingly frustrated.

The Fed crackdown came as part of this year's annual stress test, banks say. Even institutions that passed the test in March

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Dmitry Pugachevsky, director of research at Quantifi, explores why building an accurate and robust interest rate curve has considerable implications for a broad range of financial operations – from setting benchmark rates to managing risk – and hinges on…

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