This tangled web: banks seek to contain systemic model risk

Network studies are being used to identify model dependencies and concentrations

Ask any bank risk manager about interconnectedness and the conversation will quickly turn to the complex interlinkages that tie the fortunes of one firm to those of other financial institutions.   

Yet this preoccupation with external threats may have blinded risk managers to the dangers lurking within their own institutions – namely the interconnectedness of quantitative models used to price trades, value exposures, measure risk and manage capital.

“We need mechanisms to address systemic

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