With the processing power of modern computers, it is now possible to estimate the joint probability distribution of many risk factors and, given this distribution, to simulate the probability distributions of losses for large, complex portfolios.
Over the past decade or so, the largest banking organizations have invested substantial sums to hire the staff and to create the software, databases, and related management information systems to carry out such computations. Most of you are aware of the application of this technology in VAR, or “value-at-risk”, models, which are used to estimate loss distributions for trading portfolios.