Model Risk Management

21st May 2021 | Blogs

By CLIMB

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Following the blueprint of the some research and studies of Model Risk Management (MRM), CCAR these statements represent a path to recognize as benchmarks of standards to follow during engagement. At Climb, we recognize while the scenario may change given the (particular Enterprise engaged) & other considerations to be aware of include: Risk Appetite, Institutional focus, Value alignment, MRM maturity, and other capital & investment outlay commitments within the bounds of investment of technology, channel partner distribution, platform strategy, legacy operational transformation, omni-channel strategy, Portfolio consolidations (migrations – redistributions), divestitures or M & A activities, organic growth initiatives, etc

1. The shift to risk-based regulatory approaches continues, easing the burden for regional banks but not for the largest firms.

Our model recognizes the unique requirements of regulation specific to the asset class size of the enterprise and Risk tolerance of legacy portfolio assets, growth initiatives, and current shareholder obligations among many other factors as it relates to capital & operating requirements set forth by the Fed, Tailoring Rule, and the Basel standards & regulatory bodies. Given the complexity of the Financial Services industry, our model allows for each Enterprise the opportunity for a fully customization of Risk weighted foundational metrics to pull from to allow the most efficient utilization of the value provided across the portfolio, specific to the Enterprise.

2. Internal controls remain an area of relative weakness.

As a team we understand the importance of control and the level of necessity it has become in regards to efficient capital distribution, sound Risk Management, operating Model Risk Management, and credit making decisions. Our strategy starts and continues with sound communication of understanding the Enterprise focus and importance of market leadership. That foundation of clear communication allows our firms to craft and refine the model to the standards of the Enterprise. We understand that needs are different and every client experience is unique. Communication, execution, and customization is how we win together for maximum value benefit. More control through data analysis informs us all to make better decisions is our ultimate destination.

3. Expectations for model-risk management in CCAR reflect broader regulatory priorities for risk management.

MRMs, by nature, are new and unfounded, hence regulator concern and continued scrutiny of such models employed by many of the larger institutions. CLIMB will treat our MRM no differently than what a regulator would and will do so by implementing a fully documented process that has been questioned, reviewed, audited, tested, and verified. Leveraging our processes and procedures, CLIMB will also seek to ensure that our model will:

  • Have defined, repeatable measures for validating the qualitative data so that participants will ensure they are being properly identified within their data sub-set so to ensure ongoing comparative peer data to allow future growth and improvement. This will be achieved through routine population and data testing that will be further developed in the future.
  • Have set and known limitations, which will be used to ensure that the product is being marketed and sold in manner representative of the value being offered. Product uses, and applications will be clearly outlined. CLIMB must assure end users the level of risk management provided within the product suite, but to also clearly outline what is not being offered or included. Limitations as noted and determined, will provide ways for CLIMB to continue to develop the model as we continue to push past known limitations and discover new ones through our ongoing refinement. This constant state of self- analysis will allow for the model to continue to adapt into other use-case verticals.
  • Not be a static number, but instead a fluid measurement capable of augmentation to meet the needs of multiple user types over multiple industries. CLIMB’s quantified outputs and qualitative assessments will continue to be challenged and addressed to ensure we are recognizing all persons looking to CLIMB. Early on with a limited data set and small population, this will be difficult to do, but as the pool grows, our approach and mechanics can always be assessed to ensure the best metric is being generated.

4. The imperative grows for governance that enables an agile process.

With Design in Mind at the center of the model, our interpretative solution is a model that thrives on scrum principles and iteration. While the foundation of the model is a solid building block – we do offer the engaged Enterprise unique market paths to compliment core value by diversifying development beyond the 1st of 7 portfolio metrics to glean value from utilizing the flexibility of Agile business practices.

5Proactive firms are investing in automation and using CCAR machinery for better business-as-usual decision making.

A driving mechanism of effective value in any industry, is simplicity and versatility. While the influences of Risk within an Enterprise may indeed be different, if the approach to solving the complex problem is crafted responsibly – professional research & with creativity achieving the outcomes of automation can be easily simplified. Over complexity, doesn’t lead to better. This is true across all disciplines, domains, and industries. – Smooth automation can be created through different approaches of the traditional pillars of finance, especially as it relates to Risk Management. Automation excels utilizing our solution.

6. Deliberate talent management enables CCAR sustainability and integration with business decision making.

Every business operates with Human Capital at the core of its value proposition. Our team understands that business gets from strength to strength by leveraging the regional talent pool that supports the area the Enterprise serves. Our model was created with the mindset of novice, intermediate, and expert levels of Risk practitioners use for evaluation, understanding, and operation of the model at various degrees of interest and expertise.

 

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