Banks should also remember that past experience is not always predictive of future events, meaning that they should be somewhat creative in designing potential shocks. In CRE, for example, banks should move beyond considering single-name risk and include scenarios involving broader risks to the CRE sector and how such risk may be correlated in times of stress with other parts of the portfolio.
In addition, a number of risk-measurement and risk-quantification challenges relate to valuation practices, particularly with new products. Firms should have greater motivation for applying proper valuation practices as part of good risk management.