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Types of Regulatory Frameworks

The document outlines various regulatory frameworks in finance, including CCAR, DFAST, CECL, FRTB, Basel III & IV, and ICAAP, each with specific definitions, assessments, and modeling techniques. These frameworks are essential for measuring and mitigating risk in financial institutions. Understanding these models is crucial for finance professionals to ensure compliance and build effective risk management strategies.

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138 views8 pages

Types of Regulatory Frameworks

The document outlines various regulatory frameworks in finance, including CCAR, DFAST, CECL, FRTB, Basel III & IV, and ICAAP, each with specific definitions, assessments, and modeling techniques. These frameworks are essential for measuring and mitigating risk in financial institutions. Understanding these models is crucial for finance professionals to ensure compliance and build effective risk management strategies.

Uploaded by

Aditya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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| PUNEET KHANDELWAL 01

TYPES OF
REGULATORY
FRAMEWORKS IN
FINANCE
Regulatory Models Every Quant Should Know
02

1. CCAR (COMPREHENSIVE CAPITAL


ANALYSIS AND REVIEW)
Definition: A stress-testing framework
by the Federal Reserve for large US
banks.

Assesses: Capital adequacy under


extreme economic conditions.

Modeling Techniques:
Macroeconomic scenario modeling,
Monte Carlo simulations, regression-
based stress testing.
03

2. DFAST (DODD-FRANK ACT STRESS


TESTING)
Definition: A regulatory stress test for
mid-sized banks, ensuring they can
absorb financial shocks.

Assesses: Capital resilience and loss


absorption during downturns.

Modeling Techniques: Loan loss


modeling, scenario-based stress
testing, time-series forecasting.
04

3. CECL (CURRENT EXPECTED CREDIT


LOSSES)
Definition: A forward-looking credit
loss framework requiring lifetime
expected loss estimation.

Assesses: Credit risk and provisioning


adequacy.

Modeling Techniques: Probability of


Default (PD), Loss Given Default (LGD),
Exposure at Default (EAD), lifetime loss
forecasting.
05

4. FRTB (FUNDAMENTAL REVIEW OF THE


TRADING BOOK)
Definition: A Basel Committee
regulation for improving market risk
sensitivity.

Assesses: Trading book risk and


market risk capital requirements.
.
Modeling Techniques: Expected
Shortfall (ES), Value-at-Risk (VaR),
Internal Models Approach (IMA),
Standardized Approach (SA).
06

5. BASEL III & IV


Definition: A global regulatory
framework for banking stability,
focusing on capital, leverage, and
liquidity.

Assesses: Capital adequacy, liquidity


risk, leverage ratios.

Modeling Techniques: Risk-weighted


asset (RWA) modeling, liquidity stress
testing, leverage ratio calculations.
07

6. ICAAP (INTERNAL CAPITAL ADEQUACY


ASSESSMENT PROCESS)
Definition: A risk-based assessment
to ensure banks hold sufficient capital
for all material risks.

Assesses: Credit, market, operational,


and strategic risks.

Modeling Techniques: Economic


capital modeling, stress testing,
scenario analysis, internal risk models.
08
REGULATORY MODELS DEFINE
HOW RISK IS MEASURED AND
MITIGATED.
Understanding them is crucial for quants,
risk analysts, and finance professionals to
build robust models that align with global
standards.

💬 Which of these regulatory models do you


work with the most? Drop a comment!

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MORE INSIGHTS ON
QUANT AND FINANCE

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