Capital Markets Examiner School, Providence, RI

IRR Simulation Models

 In general terms, Regulatory Guidance states that there is no reason why a bank shouldn’t be using simulation models for measuring Interest Rate Risk.

 Models can be developed in-house.

 Models can be purchased and run in-house.

 Modeling can be outsourced to a third-party.

Evaluating IRR Simulation Models

 We are not PhD’s in mathematics, statistics, and economics.  We do not have the expertise to determine if a model is accurate  Model Validation will be discussed tomorrow

 But we can evaluate if the model is appropriate given the risk profile and balance sheet structure, and if the model meets Regulatory requirements.