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IF YOU WORK AT A LARGE BANK AND ANSWERED “YES,” then it may surprise you to learn that at an April 2014, model risk workshop hosted by the Richmond Federal Reserve, two of the authors of the guidance (David Palmer and Michael Sullivan), stated that no bank, regardless of its size, is fully compliant. That is after a late-2013 “horizontal review” of model risk management at many Comprehensive Capital Analysis and Review (CCAR) banks, as well as a review of model governance as a part of CCAR.
If you work at a smaller bank, and your firm’s models have not
been scrutinized as part of a Dodd-Frank Act Stress Test (DFAST)/
CCAR review, a targeted review of model risk management, or as
part of another review (e.g. retail or commercial credit), then become prepared. Since the guidance was released, models and their
governance have been scrutinized as heavily as any function or area
within banks, and there is no indication that the scrutiny will abate.
What do you need to know to close gaps and cost-effectively
minimize the potential adverse consequences from model usage?
1. Development, where model risk can be most efficiently managed and minimized through careful and thoughtful design;
2. Validation, which to date, has received much attention and
regulatory scrutiny; and
3. Usage, where, in many ways, the ultimate responsibility lies.
The very worst model isn’t harmful if its output is ignored for
decisions and excluded from financial and regulatory reports.
While “development” usually refers to models built in-house, we
will also discuss the requirements for vendor models, particularly
Model Risk
The joint supervisory guidance on model
risk management, known as SR11-07 or
OCC-2012-11, is now over three years old.
Is your bank fully compliant?
BY ANDY SPERO
The Executive’s Guide to
