HOW TO ENSURE MODELS ADD VALUE BEYOND REGULATION AND

HOW TO ENSURE MODELS ADD VALUE BEYOND REGULATION
AND
WHY REGULATORS ARE NOT YET CONVINCED THEY DO
PAUL SHARMA
[email protected]
21 JULY 2015
REGULATORS’ CONCERNS / MISPERCEPTIONS AS TO FINANCIAL MODELS
 Financial models typically understate risk (Pillar 1)
o Extreme risk arises from a different causal process to normal risk
o Financial models are self-referential
 Financial models divert focus from good risk management (Pillar 2)
o The use test is rarely truly met, and therefore the incentive structure to produce
good models is not in place.
o Financial models often overreach attempting to parameterise the un-measurable
o Experience from the global financial crisis shows models to be poor descriptors
of the present and poor predictors of the future.
 Financial models reduce market discipline (Pillar 3)
o Adequate market disclosure of the key methods and assumptions in a model is
often very difficult to achieve.
o As a result financial models are incomparable from one firm to another and even
for the same firm from one time period to another.
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REGULATORY ADVISORY SERVICES
Paul Sharma
Managing
Director
E: [email protected]
D: +44 (0) 0207 863 4789
M: +44 (0) 795 748 3897
Paul Sharma is a Managing Director with Alvarez & Marsal and co-head of the firm's Financial Industry
Regulatory Advisory Services practice in London. He was formerly Deputy Head of the UK's Prudential
Regulation Authority (PRA) and an Executive Director of the Bank of England, and has over 20 years of
experience as a top U.K., EU and global financial services regulator.
At A&M he has led:  conduct, prudential, resolution and financial crime reviews for global, EU and UK regulated
financial entities – retail, private, commercial and investment banks, non-bank financial firms – and insurers to
help demonstrate regulatory compliance / overcome issues to the satisfaction of EU, UK and US regulators; 
regulatory due diligence for Private Equity firms acquiring regulated financial entities; and  expert witness and
litigation support work in respect of regulatory compliance.
As Deputy Head of the PRA, and earlier serving as a director of the Financial Services Authority (FSA), he was
responsible for major regulatory reforms including the liquidity, capital adequacy, (Vickers) ring-fencing, risk
management, governance and senior persons standards for banks, and the solvency, technical provisions, risk
management, governance and senior persons standards for insurers. He led the U.K. regulator's negotiation and
implementation of the BCBS's Basel 2 and 3 standards, the IAIS Common Framework standards and the EU
Capital Requirements and Solvency II directives. He was also a member of the Bank Resolution Committee of
the Bank of England.
At the FSA, he was also responsible for the wholesale conduct implementation of the EU Markets in Financial
Instruments Directive (MiFID), for the client-asset and client-money regime, and for the regulatory reporting
regimes (COREP, FINREP, insurance). He participated in the FSA's reforms of the mortgage market and in the
FSA's retail distribution review (RDR). He also led the FSA's risk review department of quantitative and
qualitative risk specialists, responsible for validating the financial modeling of banks and insurance companies.
He was co-chair of the FSA’s Guidance Committee which issued guidance including on the Listing Rules,
Prospectus Rules and Disclosure and Transparency Rules, and was a member of the FSA’s Executive Policy
Committee that approved consultations including on the AIFMD EU Directive and set the FSA’s EU negotiating
strategy including for the MiFiD2, EMIR and MAD2 / MAR EU directives and regulations.
He was a member of the Joint Committee of the three European Supervisory Authorities (ESMA, EBA, and
EIOPA), and chaired its sub-committee on risk that prepared the Joint Committee’s report on Risks and
Vulnerabilities to the EU Financial System. He was the UK regulator’s alternate member of the European
Systemic Risk Board, and of the boards of supervisors of the European Banking Association and the European
Insurance and Occupational Pensions Authority. He was a member of the Basel Committee on Banking
Supervision (BCBS), and served on the Executive Committee of the International Association of Insurance
Supervisors (IAIS). He chaired the BCBS’s Macro-Prudential Group and the IAIS’s Financial Stability
Committee, responsible respectively for identifying globally systemically-important banks and insurers.
Before becoming a regulator, Mr. Sharma was a specialist financial services accountant, auditor and consultant
at a Big Four accounting firm. He is an accountant (UK chartered) and actuary (Honorary UK Faculty of
Actuaries) and earned a master’s degree in mathematics from Cambridge University.
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