If it's broke..

With banks required to develop internal processes to measure capital adequacy under Pillar II of Basel II, the use of economic capital models has become increasingly widespread. But recent market turbulence has raised doubts over whether the current models are fit for this purpose. Rob Davies reports

Risk quantification, never the most straightforward of tasks, has become a great deal more problematic in the past 18 months. With the global credit crisis escalating into a stress scenario deemed unthinkable during the early part of 2007, there are many who now question the heavy reliance on modelling techniques in risk management.

Models to assess credit, market and operational risk - the three major risk types classified in the Basel II Accord - have come under fire, with critics zeroing in