Case Study Details

Overview

A leading global investment bank requested a validation and review of over 20 stress-testing models to support their annual CCAR submission and other key regulatory requirements.

Purpose

Facing a strict deadline, our client needed an effective and efficient validation of their newly developed models used for regulatory stress-testing purposes.

The models under review were designed to generate P&L stress through the application of relevant market data shocks to a highly diversified set of individual risk factors, including: interest rates, yields and spreads, equity values, default curves, inflation, FX and volatility surfaces.

Approach

Capitalising on our global network, the validation team consisted of on-site and remote team members with deep expertise in market risk and validation. After assessing the models in scope, we developed a detailed test plan aligned with both SR11-7 standards and the client’s internal validation requirements.

To ensure appropriate risk factor coverage, our market risk experts coordinated with the client to define a representative test portfolio on which to perform the validation review. Each individual risk factor model was subject not only to a conceptual assessment but also independent replication and benchmarking against alternative methodologies, all of which were conducted using the client’s quantitative library and scripting tools.

The team conducted additional portfolio-level testing to capture potential cross-risk factor effects and evaluate the overall robustness of the modelling environment. To facilitate a timely completion and maintain transparency with the client, the team developed internal reporting and workflow management tools to track issues and approvals.

Outcome

The conclusions from the validation and review enabled the client to assess the efficacy of their P&L stress-testing models and identify key deficiencies to be mitigated. The client’s existing validation procedures and reporting templates were also enhanced to ensure CCAR compliance. Combined with a review of their Capital Plan and Fed exam preparedness, our team helped strengthen the soundness of the client’s annual CCAR submission.

By implementing a standardised validation framework, we ensured that the validation exercise was also valid for future use cases without additional revalidation work being required. The development and delivery of additional workflow tools (including model inventory, issues log and remediation tracker) were subsequently adopted by the client for internal application.

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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.