Scenarios for all seasons

Financial institutions need to know how changes in economic scenarios may affect their risk and capital. In the wake of the subprime crisis, a growing number of banks are using economic scenario generators to devise new situations and measure the impact on capital. Clive Davidson reports

Banks have been found sorely wanting over the past year in terms of their ability to model future events and understand the depths of the risks in their portfolios. For all the sophistication and complexity of pricing and risk models, many financial institutions severely underestimated their exposures, had little idea of how they would be affected by heightened market stress and failed to account for liquidity risk. Part of the problem is the narrow and short-term view of the world taken by many