Capital Markets School - October 2023

Internal Use Only

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.

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Internal Use Only

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.

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