Tag Archives: complexity

Extracting insight from complexity

John Hill and Jamie Coen.

The financial system is complex and highly interconnected.  Indeed, interactions between agents are key to its functioning.  But these interconnections have the potential to turn small shocks into systemic crises.  Understanding the complex nature of these interconnections is important, but can also be difficult. In this post we introduce new tools designed to analyse the financial network and help analysts build a better understanding of risks posed by interconnectedness.

Continue reading

4 Comments

Filed under Financial Stability, Macroprudential Regulation, New Methodologies

It’s a model – but is it looking good? When banks’ internal models may be more style than substance.

Tobias Neumann.

Most large banks assess the capital they need for regulatory purposes using ‘internal models’.  The idea is that banks are in a better position to judge the risks on their own balance sheets.  But there are two fundamental problems that can arise when it comes to modelling.  The first is complexity.  We live in a complex world, but does that mean a complex model is always the best way of dealing with it? Probably not. The second problem is a lack of ‘events’ (eg defaults).  If we cannot observe an event, it is difficult to model it credibly, so internal models may not work well.

Continue reading

Comments Off on It’s a model – but is it looking good? When banks’ internal models may be more style than substance.

Filed under Banking, Financial Stability, Macroprudential Regulation, Microprudential Regulation