Covid chaos spurs on search for model risk aggregation
Many models failed in pandemic, but analysing them in clusters easier than whole-bank view
The Covid pandemic tested bank risk modelling beyond breaking point. The sudden and near-total economic shutdown in 2020 was accompanied by unprecedented levels of government support that cushioned the impact, and then followed by the equally sudden recovery as lockdowns were lifted in 2021.
All those events fell outside the boundaries of most model assumptions, even accounting for realistic tail risks. But banks don’t want to throw out all the models just because they could not keep up with
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