Hazards of Using Simplistic Scenarios with Monte Carlo Plus

Dr Mustafa Cavus from Monte Carlo Plus will discuss the hazards of firms using “simplistic” scenarios as a basis to assess their operational risks. Firms often use a very simplistic approach to calculate their risks within the ICAAP framework, by simply adding the scenarios. This neglects diversification benefit between scenarios, i.e. that not all scenarios cannot happen at the same time. That is, they often leave “money on the table”. As a result, their capital requirement is higher.

Dr Cavus will also talk about new prudential requirements for investment and brokerage firms effective from 2021, which will change the minimum capital requirements for firms. It will impact market, credit and operational risks and the methods for computing those. It will introduce new set of so-called K-factors and potentially mean higher capital requirements for brokerage firms.