Case Study Details

Overview

A large Asia/Pacific bank was moving from the Standardized Approach (TSA) to the Advanced Measurement Approach (AMA) model, aiming to develop a robust Operational Risk model for capital steering, management decision making as well as complying with regulatory guidelines.

Purpose

A large Asia/Pacific bank was moving from TSA to AMA approach targeting to develop a robust model for capital steering, management decision making and following the regulatory request.

The bank has undertaken a strategically inaccurate decision, allowing framework and modelling teams address the challenge independently which resulted in considerable misalignment between the model information required and information available. As a result, the bank was facing several risks such as not being able to design and implement a robust OpRisk model in line with internal and external expectations, and material costs due to inefficient use of the internal resources.

Risk Dynamics was contacted to perform validation at a stage when the OpRisk model framework had already been designed, but the model methodology had not yet been finalized. This allowed Risk Dynamics to help the client make reasonable and strategic decisions and develop a model in line with the industry best practices.

The modelling team then developed the model in several phases. Risk Dynamics performed the validation of the model progressively based on the information available.

Approach

In order to achieve our goal and help the client in the best possible way, we split the validation into three phases.

First Phase: We performed a high level analysis of the model architecture, bank’s organization, available data, model framework and intended methodological choices through a series of workshops with different stakeholders. Based on this, we were able to provide a high level conceptual opinion on the model status, and suggest next steps in line with the bank’s risk appetite and capabilities. We also provided the modeling team with the view on a test plan which was necessary to implement, to ensure the models accuracy, precision and robustness going forward.

Second Phase: The second review of the model involved the incorporation of our feedback and the development of the model methodology. We performed an in-depth conceptual review of the newly developed model documentation, provided our opinion on the approach and refined the test plan. Based on this the modelling was able to take the next step of model implementation and testing.

Third Phase: We performed an end-to-end, conceptual and applied validation, full code review scenario analysis audit and scenario analysis benchmarking. We concluded that the model in its current state was not suitable for capital computation purposes and suggested further improvements. The main reason for the rejection was that the gap between the work performed by the framework and the modelling teams was too vast and required a full reset in terms of model inputs and their uses. The model submission was then postponed by 12 months.

Outcome

Despite the model being approved by the regulator (due to the changes in the regulatory requirements for OpRisk Capital computation), this project has aided the client in several ways.

Primarily, the communication between modelling, operational risk management, frameworks and business teams has considerably improved.

With our support, the client was able to understand more cohesively the end to end process of model development, validation, and applicability.

The client was able to enhance the scenario analysis process, which provided a greater view on the bank’s risk profile and exposure to extreme but plausible events.

In conclusion, 12 months later, based on our input the client has managed to develop a robust, granular and flexible model, which was able to assess risk at different levels of the institution and provide a transparent view on the banks Operational Risk exposure for further internal decision making.

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author-image

SAM ISBISTER

Managing Director

ABOUT US

Why Risk Dynamics?

Risk Dynamics has unparalleled experience in model risk management and independent validation of risk models. We have supported financial institutions of all sizes, worldwide, since 2004.

Our focus and dedication to model validation services, our independence and benchmarks and proprietary tools and methodologies, combined with our ability to provide unbiased views across regions and regulatory regimes, is unique in the market.