6.2 Models

Models consist of a broad range of calculations or algorithms designed to output metrics based on specific inputs or variables. They play a vital role in decision-making, scientific research, and problem-solving by providing a structured framework for analyzing complex systems and phenomena. Models range from simple equations to complex simulations, serving to simplify real-world phenomena for better understanding and prediction.

In the banking domain, stress testing models are crucial for assessing the resilience of financial institutions to adverse scenarios. These models simulate potential economic downturns or crises to evaluate how banks' assets, liabilities, and overall financial health would be affected. The complexity of models can vary significantly depending on the nature of the problem they are designed to address. Some models may involve straightforward mathematical formulas, while others may require advanced computational techniques, algorithms, or simulations to accurately represent intricate systems or processes.