Q1 – Can you tell the Risk Insights readers about yourself and your professional experiences?
I’m Head of Capital & Ratings Methodology, part of the Risk Methodology Group in Nomura where I’ve been since 2010. Before that I worked in Market Risk Methodology at Citi. Amongst other things I worked on the risk models during the subprime crisis, which was one of my most memorable professional experiences, as we tried to respond to once-in-a-generation market shocks.
Q2 – We are looking forward to you delivering a presentation on P&L attribution. Why do you feel this is a key talking point at the Summit?
P&L Attribution is well known to be the most controversial aspect of FRTB. Banks understand the desire to have a more stringent test of model eligibility, but the way the test is designed makes it very hard to pass, without making fundamental system changes which have limited risk management benefit.
Q3 – Can you explain some of the difficulties in passing the P&L attribution tests?
The key issue is that the test is measuring how well the risk model can predict P&L from front office systems, which is not what the models were designed to do (rather they try to forecast tail losses). And the changes banks have to make to achieve this mean we have to tie the risk system very closely to the Front Office in terms of data and processes, which isn’t always the best approach for managing risk.
This is exacerbated by the design of the test statistic, which is highly sensitive, and the dramatic consequences of failure (removal of IMA, rather than a capital multiplier, for example).
