The Banker Highlights MITRE's Work on Risk Management in Cover Story
The Banker, an international financial affairs publication owned by The Financial Times, interviewed MITRE's Brian Tivnan and Barry Costa on agent-based modeling and risk management. On March 1, MITRE was heavily featured in The Banker's cover story on "The New Science of Risk Management," about ground-breaking simulation tools. The article, written by Silvia Pavoni, highlights MITRE's work with the U.S. Department of Treasury, agent-based modelling, and more. Brian Tivnan is also quoted.
The idea that big data and emerging modelling technology techniques can help manage risk is becoming more prevalent, as is the recognition that risk managers need new approaches and faster tools to deal with uncertainty….
The US Treasury's office of financial research started this process early, shaken by the inability of traditional tools to see the faultlines that led to the financial crisis. In 2013 it asked MITRE, a US organisation with nearly 8500 staff and which runs federally funded research projects that span across crucial sectors from national and cyber security to healthcare, to come up with a new solution.
"What we set out to do was to develop a dynamic platform to do stress testing at the system level rather than the level of individual ﬁnancial institutions, which was really the prevailing approach leading up to and through the ﬁnancial crisis," says Brian Tivnan, MITRE’s models and simulation chief engineer, who led the team that developed such a solution for the US Treasury.
MITRE's own financial application of agent-based modelling derived from the experience in other ﬁelds. The organisation's ﬁrst such tool was deployed for the military to build a high-resolution model of coalition forces in the counter-insurgency activities in Afghanistan more than a decade ago.
From biology to the military to macroprudential activities, simulation–through agent-based models or otherwise—can ﬁnd applications within commercial banks too. The software that Simudyne has built is based on MITRE's intellectual property. The idea behind the partnership is that the more central banks and commercial banks will adopt those models, the safer global banking systems will be, to the beneﬁt of the US too.
Traditional risk models had focused on the value at risk at individual institutions and then, with the introduction of stress testing by banking supervisors after the ﬁnancial crisis, on taking a picture of how each bank would perform should a series of shocks be introduced in its environment. Those were static, primarily backward-looking methods. The idea now is to allow the risk function to consider how the interactions (rational or otherwise) within the system, connecting counterparties and taking into consideration human behaviours such as panic, could lead to instability and systemic collapses. By incorporating human behavior into possible scenarios, agent-based models can help understand the impact of policy decisions on market sand the economy, according to MITRE.
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