November, 2009 – KPMG 2009 Annual Insurance Issues Conference, Toronto, Ontario, November 26, 2009 – I have often heard people say that the global financial crisis has demonstrated that the use of models was a fatal mistake by both regulators and financial institutions. Further, some say that the widespread use of models in the financial sector should be halted.
This is the wrong conclusion to draw from the financial turmoil. In fact, financial institutions that proved to be the most resilient during the crisis, and who acted earliest to protect themselves, were institutions that used models as one part of an extensive tool-kit, combined with strong risk management around their models.
Today I am going to talk about how widespread the use of models actually is, and explain how models can augment our ability to assess risk, and why we need to harness this benefit. I will also talk about how models can increase risk if not constructed, monitored, and adjusted properly.
- Widespread use of Models
- Modeling Constraints
- Management of Risk around Models
- Macro Economic Models
- Accounting Models
Models are a key part of the effort to better understand and manage risk in the financial sector, but they require an abundance of caution. When used properly financial institutions can get a better handle on risk. When used improperly, the risks for financial institutions increase.
Many financial institution models are very well developed and have proven their worth. Other models, such as macro models incorporating a financial sector, are far less developed, but progress could be made quickly given the focus on them.
And finally, models do not predict black swans.
To read the remarks in full, go here
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