When the COVID-19 outbreak became a global pandemic, financial-markets volatility hit its highest level in more than a decade, amid pervasive uncertainty over the long-term economic impact. Calm has returned to markets in recent months, but volatility continues to trend above its long-term average. Amid persistent uncertainty, financial institutions are seeking to develop more advanced quantitative capabilities to support faster and more accurate decision making.
As financial markets gyrated in recent months, banks faced particular problems calculating value at risk (VAR) across asset classes. Many institutions experienced elevated levels of VAR back-testing exceptions, leading to higher regulatory-capital multipliers. Increases of as much as 30 percent were reported, prompting regulators to apply exemptions in some cases. There were also challenges with valuation adjustments, as derivatives faced snowballing collateral calls and increasing funding costs. Where...
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