Case Study Details

Overview

The generic validation guidelines developed for this European bank aimed at reflecting a robust validation methodology with an efficient and effective validation process and supporting governance structure.

Customised validation guidelines were also drafted for IRB and IFRS 9 models, including references to specific regulatory requirements across all validation dimensions, and more specifically, on the nature of tests required the validation guidelines specific to these model types included the respective testing framework based not only on regulatory requirements but also on industry best practices.

Purpose

A large regulatory push drove the review of the client’s existing IFRS 9 and IRB validation documentation. The MRM function and validation team at the bank also had large backlog of different models to be validated and wanted to standardize the validation process while ensuring that they met all regulatory requirements. Therefore, the head of MRM deemed it relevant to develop a generic set of guidelines to ensure uniformity of practices across different teams.

In the case of IRB models, the validation guidelines were extensively reviewed to ensure that they were in line with the latest regulatory requirements (RTS), and that the bank was performing validation in line with peers.

For IFRS 9, the client was in the process of developing models as part of regulatory implementation required in 2018 and therefore wanted to assess whether their current validation methodology was appropriate for regulatory approval. Moreover, the client was also keen on obtaining an expert view of regulatory requirements and peer benchmarking.

Approach

The Risk Dynamics team led the project in 2 phases:

In Phase 1, the team defined the overall objective and content of the generic validation guidelines, including validation requirements, the concept of tiering for validation prioritization, levels of validation depth, and the infrastructure necessary for a robust validation process and reporting

In Phase 2, the team applied the structure defined in the generic validation guidelines to the specific case of IRB and IFRS 9 models, which included specific regulatory requirements, tests, etc. Furthermore, Risk Dynamics reviewed the whole validation methodology (domains), mapped to the relevant regulatory requirements and provided a cartography of testing with benchmarking best practices (what type of testing peers perform).

Our team proposed validation guidelines which were based on documentation, constant feedback with the client, and our experts’ deep knowledge of industry best practices in validation.

Outcome

The client implemented the validation guidelines developed by the RD team across all model types. The objective was to prioritise standardisation of practices, which is a key lever for future performance and optimisation. As a result, the guidelines provided the client with the latest view on regulatory requirements for IRB, including comprehensive methodological documents that introduce a new domain, particularly IFRS 9.

Risk Dynamics also provided benchmarks on validation methodology and specifically on methodological aspects related to IRB and IFRS 9, levels of prioritisation (validation depth), validation documentation standards, and updated regulatory requirements.

Overall, the client was able to greatly improve the quality of its validation process, methodology and documentation, set up foundations for standardisation, and enhance the validation function as a whole.

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SAM ISBISTER

Managing Director

ABOUT US

Why Risk Dynamics?

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

In MRM, our benchmarks are market-leading and based on annual surveys input of close to 100 leading financial institutions. Our proprietary model risk management framework allows us to follow our client along the entire path of a model risk management transformation.