Prudential Regulation in the Age of Internal Models
Some of the most significant changes in banking law since tl1e global financial crisis involve attempts to make banks more financially stable through more rigorous requirements about how they finance their lending and investment activities. Central to this is the growing use of quantitative models by banks and their regulators to conduct financial war games that simulate how a bank would fare under adverse market conditions. These models - known as "internal models" because they are often proprietary and non-public - attempt to simulate how future states of the market would impact a bank's financial structure, in particular its ability to absorb losses without interrupting operations. Regulators first approved these internal models in the 1990s to track some of the risks in bank investments held for trading. Since then, regulators have authorized model-based approaches for a wider range of financial risks - including credit and liquidity risks - and for some nonbank financial entities, like broker-dealers. Today, many banks use these models to comply with prudential regulation about safety and soundness.
Abingdon, Oxon ; New York, NY
Banks & Banking, Business Ethics, Finance, Investments & Securities
Banking and Finance Law | Law
José M. Gabilondo, Prudential Regulation in the Age of Internal Models, in THE ROUTLEDGE COMPANION TO BANKING REGULATION AND REFORM 360, 376 (Ismail Ertürk and Daniela Gabor eds., Routledge 2017) (ebook).