Case Study Details

Overview

A global financial institution requests a full scope validation of a key component supporting their RRP methodology, used by C-suite executives to define both contingency plans and recovery actions in case of adverse events.

Purpose

A large Bank Holding Company (BHC) requested a first-time validation for their 2017 Recovery and Resolution Planning (RRP) submission. These plans, also known as living wills, describe the company's strategy to quickly react to severely adverse events, or failure of the company. The primary component under review was the aggregator used to generate the financial impact under a given scenario, which consisted of multiple data, input models and assumptions.

Approach

The validation team’s first task was to ensure the completeness of all assumptions, data consistency, and accuracy of both the data imported as well as any pre-processing done on the raw data inputs themselves. The aggregator depended on multiple input models sourced across the organisation, and it was critically important for the team to assess the soundness of these inputs that fed into the core assumptions.  

 With the data component of the validation completed, the team’s next task was to address the processing component of the model. The methodological soundness of the model and adherence to regulatory guidelines was evaluated through a rigorous review and challenge, including a line-by-line code review of the entire aggregator.

 The outputs from the aggregator were subsequently compared to a benchmark model (with alternate assumptions) designed by the team. In addition to benchmarking, sensitivity and robustness analyses were also conducted by applying percentage-based ladder shifts to the model’s hyper parameters.

Outcome

The validation team discovered critical issues in the financial aggregator which were unknown prior to review. Through this effective review and challenge, the team helped the client realise these issues within a matter of weeks, allowing for significant enhancements and reduction in the associated model risk. Given the large number of assumptions and outputs, the team also developed tools for the client to allow for automated testing of the aggregator, greatly reducing the time required to test key assumptions.

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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.