A great deal of progress has been made in this area in recent years. With the Single Supervisory Mechanism we now have a system of supervision that is less liable to capture or forbearance. The Bank Recovery and Resolution Directive provides a harmonised and predictable framework for private sector risk-sharing across the Union.
When markets struggle to clear at any price, and when cross-border exposures grossly multiply the number of relevant variables, formal modelling to support risk management becomes difficult. By definition, tail risk analysis is about extrapolation of observed behaviour to speculate about scenarios never before seen. We should be humble about our frameworks’ ability to capture these scenarios.