Explanation:
While expert judgment is involved, the calibration of EWI thresholds is typically grounded in historical data. Firms analyze historical trends and stress events to appropriately define the green, amber, and red zones. Regulators provide broad principles (such as BCBS 2008) rather than specific, prescriptive threshold values, and the stoplight system remains a widely used, effective tool.
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20.4.3. Venkat explains that firms often use a stoplight system to manage their thresholds: "Firms generally use a stoplight system in representing and communicating their performance against the thresholds of their EWIs. A green indicator means that the measure is within normal bounds. A measure that is classified as amber according to the threshold framework should be investigated further while a red indicator should be a source for significant concern and may warrant an immediate response."
Which of the following is the BEST way to start the exercise of calibration of these thresholds?
A
Thresholds are ultimately subjective
B
Historical data can inform the calibration of thresholds
C
Practitioners observe that this stoplight system is obsolete and ineffective such that thresholds are moot
D
The firm should rely on the specific regulatory instructions, in particular BCBS 2008, for calibration of the thresholds