Case Study Details

Overview

Supporting a leading global financial institution in validating a significant set of credit risk models and exploring new operating models towards more efficiency.

Purpose

A leading global bank required the validation of 80+ Pillar 1 internal ratings based (IRB) credit risk models as part of their annual validation cycle. The bank had been using inefficient validation processes which were contributing to a significant backlog of models waiting to be validated.

Risk Dynamics was contacted by the bank to validate almost 30 credit risk models covering all risk parameters (PD, LGD, and EAD) across a broad range of exposures (Retail, Wholesale) and geographies (Netherlands, Belgium, Australia, Germany, and Luxembourg), including economic capital.

Approach

Our team was spread across several geographies (Belgium, India and The Netherlands), we initiated a lean approach with daily meetings managed through a project management application.

We followed a 3-stage approach: overarching, individual assessment (for each of the 30 models), and closing.

The overarching phase aimed at confirming the project plan, operating model, methodological approach, and identifying areas of improvement in the client’s validation framework.

 Each model required an individual assessment phase which covered the following dimensions: model discovery; conceptual review; data review; testing design and execution; documentation and report.

 As part of the closing phase, our team advised the client on the optimal validation framework and identified the trade-offs between both insourcing vs off-shoring approaches going forward.

Outcome

In addition to meeting key regulatory milestones for credit risk models and reducing the client’s validation backlog, Risk Dynamics experts assisted the client in developing an efficient validation framework through model tiering by segregating repetitive tasks with high-value-added activities, they also revised validation methodologies and reporting standards. The latter served as a pre-requisite for automation and digitization (as part of the banks’ strategy).

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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.