Magazine

Solving a Long-Standing Blind Spot in Bank Capital Models

This article examines a new diagnostic framework designed to improve transparency and accuracy within regulatory capital forecasting models. Based on work by Krishan Kumar Sharma, the framework separates scenario-generation errors from downstream model errors through advanced backtesting techniques. The methodology provides institutions with clearer insight into how inaccuracies propagate through capital forecasting systems, potentially improving governance, validation, and capital efficiency. The article also highlights the growing importance of transparency and operational rigor in model risk management as regulatory expectations continue to evolve.