Strategic Risk‑Modelling by Banks: Evidence from Inside the Black Box
Bank regulators link capital to risk, but accurately measuring risk poses challenges. Banks use internal models, impacting Value-at-Risk (VaR) predictions and their exceedance frequency. Analyzing data, we find varied VaR and violations due to simulation methods, historical data, and holding periods. Banks’ modeling choices can reduce capital requirements strategically, potentially compromising the system's stability.