Model Risk Management

Financial institutions rely heavily on quantitative analysis and models in most aspects of financial decision making such as credit sanctioning, limit setting, pricing, provisioning, regulatory and economic capital calculation, portfolio management, valuing financial instruments etc. Decisions made on models that are incorrect or are not performing satisfactorily or used inappropriately exposes the institution to potential direct and indirect consequences. Those consequences should be addressed by active management of model risk.

Supervisory guidelines such as Basel II IRB, IMA and AMA guidelines link capital requirement to internal models, thus exposing the institution to significant model risks. Asymmetrix Model Validation and Monitoring Software helps institutions in performance monitoring of its corporate and retail credit models. This is a critical aspect in achieving compliance with IRB guidelines and other regulatory guidance such as OCC (Board of Governors of the Federal Reserve System) 'Supervisory Guidance on Model Risk Management'.

Asymmetrix Model Validation and Monitoring Software

Quantitative Validation

Meet Basel II IRB validation requirements by quantitatively validating the rank ordering performance, calibration quality, benchmarking and stability of internal corporate models, retail models and retail pooling frameworks. The software automates the validation process for expert-judgement as well as statistical PD, LGD and CCF models. It allows drill-down to performance of model components such as individual factors (rating parameters) and modules (sectional ratings such as management quality, financial risk) to understand which model components are not performing satisfactorily and how the models could be refined.

Qualitative Validation

The software has an in-built framework for validation and audit teams to review model design, conceptual soundness, structure, internal use, quality of model documentation, integrity of rating process, management oversight etc. This is essential to comply with standards laid down in 'Minimum requirements for IRB approach'.

Model Inventory

To assess model risk, institutions should maintain a comprehensive set of information for models used internally, or are under development for implementation, or recently retired. The software allows validation team to build and manage 'Model Inventory' i.e. a repository of material information for models used internally.

Model Risk Assessment

The software has an in-built framework to assess model risk based on model materiality, model complexity and model performance. Model risk assessment should be an integral part of ICAAP as well as internal risk management.

Improve Profitability

Poor models carry multiple direct and indirect costs such as poor decision making, poor underwriting quality, incorrect credit pricing etc. Periodic model validation highlights the degree of faith that can be shown in the output of a model. Early detection of poorly performing models and identification of areas of model refinement is critical for improving institution's profitability.

Regulatory compliance

The software automates the periodic validation exercise to ensure compliance with regulatory guidelines. Comprehensive coverage of validation tests (including tests covered in BCBS Working Paper on Model Validation) ensures that the institution is in line with industry's best practices.

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