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The Swiss bank regulator (FINMA) does statistics like no one else. A quick story - to file under "Fat Tails Twitter".
Banks have to hold capital for market risk. This is calculated using sophisticated models that estimate the VaR or the eVaR, VaR is the worst loss you are statistically likely to take with a (say) 99% confidence, eVaR the average loss above that VaR
To check if the models work, regulators (and banks) do back-testing: if you calculate you should loose less than 1m 99% of the time, but actually loose 5m 10% of the time, you have a problem!
When back-testing does not work well, banks have a capital add-on to reflect the poor quality of the model, i.e. they need to hold more capital.
So back to FINMA. It turned out Covid had a big impact on markets (no shit, Sherlock.) More interestingly it had a big impact… on the number of back-testing violations!
So how do you manage the problem? Well, FINMA decided to freeze the number of back-testing violations from 1 February to 1 July! In other words, if your shitty model does not model fat tails properly, do not worry, we’ll just remove the fat tail data when it happens!
I get the general idea of helping banks with capital, but messing around with sound statistical analysis is NOT the best way to do it !! @nntaleb @matt_levine this should amuse you
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