Model Risk Management

Transcription

1 Mdel Risk Management May 2013 Crwe Hrwath LLP is an independent member f Crwe Hrwath Internatinal, a Swiss verein. Each member firm f Crwe Hrwath Internatinal is a separate and independent legal entity. Crwe Hrwath LLP and its affiliates are nt respnsible r liable fr any acts r missins f Crwe Hrwath Internatinal r any ther member f Crwe Hrwath Internatinal and specifically disclaim any and all respnsibility r liability fr acts r missins f Crwe Hrwath Internatinal r any ther Crwe Hrwath Internatinal member. Accuntancy services in Kansas and Nrth Carlina are rendered by Crwe Chizek LLP, which is nt a member f Crwe Hrwath Internatinal. This material is fr infrmatinal purpses nly and shuld nt be cnstrued as financial r legal advice. Please seek guidance specific t yur rganizatin frm qualified advisers in yur jurisdictin Crwe Hrwath LLP

2 Regulatry Guidance n Mdel Risk Management OCC and Federal Reserve published Supervisry Guidance n Mdel Risk Management in April f 2011 (OCC , SR 11-7) Articulates the elements f a sund prgram fr effective management f risks that arise when using quantitative mdels in bank decisin making Mdels can imprve business decisins, but they als impse csts, including the ptential fr adverse cnsequences frm decisins based n mdels that are either incrrect r misused. The ptential fr pr business and strategic decisins, financial lsses, r damage t a bank s reputatin when mdels play a material rle is the essence f mdel risk Crwe Hrwath LLP 2

3 Guidance Mandates Three Primary Areas f Fcus Mdel Develpment, Implementatin & Use Design, thery, and lgic f the mdel shuld be well dcumented and supprted Mdel methdlgies and prcessing cmpnents shuld be explained in detail Data integrity and testing are integral t mdel develpment and implementatin Mdel use must act as a prductive surce f feedback Mdel Validatin Set f prcesses and activities intended t verify the mdel is perfrming as expected Perfrmed by independent staff with apprpriate incentives, cmpetence, and influence All cmpnents, including input, prcessing, and reprting, are subject t validatin Validatin activities shuld cntinue n an nging basis after a mdel ges int use Gvernance, Plicies, and Cntrls Bank management shuld establish a strng mdel risk management framewrk Frmal plicies and prcedures shuld be dcumented t implement framewrk BUs generally respnsible fr the mdel risk assciated with their business strategies. Audit findings related t mdels shuld be dcumented and reprted t the bard 2013 Crwe Hrwath LLP 3

4 S, What is a Mdel? Guidance Definitin: The term mdel refers t a quantitative methd, system, r apprach that applies statistical, ecnmic, financial, r mathematical theries, techniques, and assumptins t prcess input data int quantitative estimates Mdels are simplified representatins f real-wrld relatinships amng bserved characteristics, values, and events 3 Cmpnents t a Mdel: Infrmatin Input Cmpnent: Delivers assumptins and data t the mdel; Prcessing Cmpnent: Transfrms inputs int estimates; Reprting Cmpnent: Translates estimates int useful business infrmatin Crwe Hrwath LLP 4

5 Typical Defined Mdels Allwance fr lan lsses impairment mdels, histrical lss calculatin mdels, migratin mdels, prbability f default mdels, lss given default mdels, qualitative factr mdels Mrtgage servicing rights - fair value estimatin mdels Securities fair value estimatin mdels Purchase accunting - fair value mdels and cash flw estimatin mdels Budgeting/Frecasting mdels Lan stress testing mdels Capital stress testing mdels Lan pricing mdels Asset/liability and interest rate risk management mdels Liquidity mdels and cntingency funding mdels Fair Lending AML 2013 Crwe Hrwath LLP 5

6 Regulatry and Business Landscape Regulatrs expectatins fr strng and effective mdel risk management prgrams cntinues t increase, particularly fr Natinally supervised banks Guidance is relatively vague and interpretatin acrss the bard While the OCC s Risk Analysis Divisin (RAD) was frmed in 1994 t assess the quantitative risk tied t enterprise, credit and market risk, it grew in respnse t the Basel requirements and the financial crisis and mrtgage melt-dwn f Regulatry agencies have nw shifted RAD resurces and attentin t assessing hw institutins manage mdels ther than simply financial mdels with increased fcus n peratinal mdels. Fairly immature mdel risk management prgrams within large and small rganizatins Mdel risk management ften resides within ERM functin 2013 Crwe Hrwath LLP 6

7 Industry Perspectives Effective mdel gvernance is mre than setting up a gvernance cmmittee and reprting structure, it requires an integrated apprach which defines enterprise standards (plicies) and executes, mnitrs, and reprts n risks at the functinal level (implementing prcedures) Despite varying risks and cmplexities f mdels, regulatrs expect a prescriptive methdlgy fr managing mdel risk A strng fundatinal mdel risk assessment is an effective tl t define depth and breadth f mdel risk management activities Effective mdel risk management requires the ability t define, mnitr, and respnd t events and risks (bth internal and external) that impact a mdel There are limitatins t every mdel and an effective framewrk practively identifies, quantifies, and reprts n limitatins Mdel ptimizatin is a separate and district functin frm mdel validatin which can drive business value and efficiencies Enabling technlgy is key t managing cmplex enterprise wide mdels 2013 Crwe Hrwath LLP 7

8 Crwe s Mdel Risk Management Framewrk The rings f the Crwe Mdel Risk Management framewrk capture the cre requirements f the Supervisry Guidance and expand n key principals: Prevailing Internal Cntrls are required t gvern the Mdel lifecycle with the Bank s Bard f Directrs prviding versight Mdel Inventry prvides a central repsitry t stre all the infrmatin related t varius Mdels Mdel requirements, design, implementatin plan, business purpse and use need t be clearly dcumented and executed accrding t sund practices Mdel Validatin is essential t verify the accuracy and effectiveness against a Standard Mdel r any available benchmarks A prescriptive mdel tuning methdlgy and Mdel analysis are necessary t ptimize the verall efficiency f the Mdels 2013 Crwe Hrwath LLP 8

9 Mdel Inventry - Enterprise Identificatin Enterprise Identificatin Accuntability Risk Assessment Enterprise Definitin f a Mdel Purpse and Related Prducts Designed Usage, Actual r Expected Usage, Restrictins Timeframe f Mdel Validity Date f implementatin/updates and plicy exceptins Reprts, Plicies, Prcedures, Cntrls, Systems Internal cntrls implemented Inputs, Outputs and Intended Use Define the expected input, utput and purpse fr the Mdel (Vendr Mdels Vs. Hme Grwn) Dates f Validatin Activities Date f planned validatin and date f cmpletin Individuals Respnsible Define thse respnsible fr develpment and validatin Functinality Details surrunding effectiveness 2013 Crwe Hrwath LLP 9

10 Mdel Inventry - Enterprise Identificatin Enterprise Identificatin Accuntability Risk Assessment Enterprise Definitin f a Mdel Purpse and Related Prducts Designed Usage, Actual r Expected Usage, Restrictins Timeframe f Mdel Validity Date f implementatin/updates and plicy exceptins Reprts, Plicies, Prcedures, Cntrls, Systems Internal cntrls implemented Inputs, Outputs and Intended Use Define the expected input, utput and purpse fr the Mdel (Vendr Mdels Vs. Hme Grwn) Dates f Validatin Activities Date f planned validatin and date f cmpletin Individuals Respnsible Define thse respnsible fr develpment and validatin Functinality Details surrunding effectiveness 2013 Crwe Hrwath LLP 10

11 Mdel Inventry Accuntability Enterprise Identificatin Accuntability Risk Assessment Prcess/System Ownership Lines f Business are generally respnsible fr the risks assciated with their business strategies/peratins; hwever in sme instances the LOB might als be the Mdel wner (LOB r Cmpliance) Internal Cntrls Mdel wner shuld ensure that Mdels in use have undergne apprpriate validatins and apprval prcesses, prmptly identify new r changed Mdels, and prvide all necessary infrmatin fr validatin activities Mdel Cmpliance Cmpliance with plicies are an bligatin f Mdel wners and risk-cntrl staff Specific prcesses in place t ensure that these rles are being carried ut effectively and in line with established plicy Dcumentatin and tracking f activities surrunding Mdels are needed t prvide a recrd that makes cmpliance transparent Crwe Hrwath LLP 11

12 Mdel Inventry Mdel Risk Assessment Cnfirm the existence f a Mdel risk assessment fr existing Mdels A Mdel risk assessment shuld help t substantiate the rigr and sphisticatin f Mdels used fr varius risk management activities acrss the rganizatin Enterprise Identificatin Accuntability Risk Assessment Factrs may include: Cmplexity, reliance, and materiality f the Mdel Uncertainty f input r assumptins Regulatry cmpliance impact Dependency with ther Mdels Financial impact Testing f data quality, relevance, and dcumentatin f assessment shuld be perfrmed 2013 Crwe Hrwath LLP 12

13 Mdel Develpment, Implementatin and Use 2013 Crwe Hrwath LLP 13

14 Mdel Develpment, Implementatin and Use Mdel Definitin Requirements & Design Data Management Analyze Results Mdel Develpment and Implementatin Mdel Definitin and Requirements cntain well dcumented requirements, thery, and lgic f the mdel supprted by published research and sund industry practices Mdel Design is primarily driven by the Mdel business requirements and specificatins Data Management includes data extractin, data massaging, data standardizatin, applicatin f the Mdel alng with transfrmatins and calculatins Mdel Use The prcess fr Analyzing Results needs t be well defined and dcumented Cntinuus Feedback and Imprvement is established t ensure that the Mdel is perfrming as expected as well as t identify pprtunities fr ptimizatin and imprvement Feedback 2013 Crwe Hrwath LLP 14

15 Mdel Validatin 2013 Crwe Hrwath LLP 15

16 Mdel Validatin Mdel Validatin is required t verify that the Mdels are perfrming as expected, in-line with their design bjectives and business uses. Cnceptual Design System Validatin Data Validatin Prcess Validatin Mdel Validatin has the fllwing fur key areas: Evaluatin f Cnceptual Design - Evaluating the cnceptual design and capabilities f the pertinent business prcesses t include the fllwing areas: Cverage Assessment Business Alignment Regulatry Alignment Develpmental Evidence System Validatin - Validating that the systems are prperly designed t execute n the Mdel with specific fcus n: System Functinality System Limitatins Data Integratin and Mapping 2013 Crwe Hrwath LLP 16

17 Mdel Validatin Data Validatin - Validating that accurate and cmplete infrmatin is captured by a system t execute Mdels by testing: Integrity f Data Input Cmpleteness Interface with case management Back testing Cnceptual Design System Validatin Data Validatin Prcess Validatin - Ensure the adequate design and nging sustainability surrunding the prcesses and administratin f the system and Mdel with fcus n: Data Testing and Recnciliatin Output Cntrls System Cntrls Prcess Validatin 2013 Crwe Hrwath LLP 17

18 Mdel Tuning and Optimizatin 2013 Crwe Hrwath LLP 18

19 Mdel Tuning and Optimizatin The Mdel tuning and ptimizatin prcess includes the fllwing key areas: Gap Analysis - t identify areas within the rganizatin that currently d nt have the necessary cverage required fr risk mitigatin Gap Analysis Prescriptive Methdlgy Dcumentary Evidence Prescriptive Methdlgy - t ensure that a cnsistent methdlgy is fllwed acrss the rganizatin and a dcumented apprach, meaningful analysis, including statistical analysis f threshld settings and selected scenaris is cnducted n an nging basis Dcumentary Evidence - t ensure that the develpmental evidence as well as ther cmpnents are thrughly dcumented thrughut the life cycle f the prcess 2013 Crwe Hrwath LLP 19

20 Mdel Gvernance 2013 Crwe Hrwath LLP 20

21 Mdel Gvernance Enterprise Wide Risk Management Incrprate Mdel Risk Management within the framewrk f the brader risk management f the rganizatin Define and mnitr event based metrics that impact the effectiveness f identified mdels Sr. Mgt. & Bard Invlvement Plicies & Prcedures Independent Audit and Testing Develp and versee mdel review plans by priritizing realized expected, and ptential risks Cnduct reviews t identify risk issues against regulatry guidelines and standard practices Rles & Respnsibility ERM & Reprting Independent Audit And Testing 2013 Crwe Hrwath LLP 21

22 Mdel Fundatin Enabling Technlgy Business & Regulatry Prject Management Enabling Technlgy Apprpriate technlgy and systems need t be leveraged t supprt varius Mdels and the Mdel Risk Management prcess Business and Regulatry Alignment Each Mdel must have a purpse and needs t align with the strategic business bjectives and regulatry guidance Prject Management Mdel Risk Management initiatives require a frmal prject management structure t ensure efficiency, accuracy and cmpleteness Supprting Dcumentatin Cmprehensive and cnsistent dcumentatin needs t be maintained t ensure that cmplete dcumental evidence exists fr every cmpnent and phase within the prcess Supprting Dcs 2013 Crwe Hrwath LLP 22

23 Preparing fr Upcming Exam Open lines f cmmunicatin Each institutin is different Make sure examiners understand yur unique psitin Align Supervisry Guidance with Enterprise standards, plicies and prcedures Enlist the aid f the Crprate Mdel Gvernance if available Define a risk based mdel risk management prcess that is as prescriptive as pssible Define what a mdel is, dcument wh wns the mdel, assess enterprise mdel risk Develp yur theme t respnd t the quantitative questins What quantitative analysis was dne t ensure that the prcess is nt a rule f thumb? T what extent can shw yur mdels leveraged the analysis f a Ph.D. quant? Hw can yu shw yur wrk t prvide cnfidence that what yu say yu d is actually dne? Take a frward lking apprach Discuss a tactical and strategic radmap and future mnitring enhancements Self-identify weaknesses r issues Be prepared t discuss weaknesses and gaps in current staffing and apprpriate actins that are taking place t address them Better t write yur wn exam results 2013 Crwe Hrwath LLP 23

24 Fr mre infrmatin, cntact: Jhn Eppersn Dawnella Jhnsn Direct Direct Mbile Mbile Crwe Hrwath LLP is an independent member f Crwe Hrwath Internatinal, a Swiss verein. Each member firm f Crwe Hrwath Internatinal is a separate and independent legal entity. Crwe Hrwath LLP and its affiliates are nt respnsible r liable fr any acts r missins f Crwe Hrwath Internatinal r any ther member f Crwe Hrwath Internatinal and specifically disclaim any and all respnsibility r liability fr acts r missins f Crwe Hrwath Internatinal r any ther Crwe Hrwath Internatinal member. Accuntancy services in Kansas and Nrth Carlina are rendered by Crwe Chizek LLP, which is nt a member f Crwe Hrwath Internatinal. This material is fr infrmatinal purpses nly and shuld nt be cnstrued as financial r legal advice. Please seek guidance specific t yur rganizatin frm qualified advisers in yur jurisdictin Crwe Hrwath LLP 2013 Crwe Hrwath LLP 24

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