However, based on some observations of how models are actually constructed and used at financial firms, I would like to outline three reasons why this concern might be overstated. First, the sophistication and structure of risk-management models vary widely.
This point applies with full force to value-at-risk models in use at commercial banks, an area the Federal Reserve has some knowledge of through our supervisory oversight. Our examiners have observed that banks implement a common objective--measuring the value-at-risk of the bank’s trading account--in highly diverse ways.