Model recent developments, particularly the U.S. regulatory capital

 Model risk management has not
historically been a strategic priority for organizations but increasing
regulatory requirement has become primary driver for banks to invest
considerable amount of time and efforts in mode risk management. Effective
Model risk management framework helps banks to deliver long-term business
benefits regardless of the specific regulations that are enacted.

 

According
to Chartis Survey on Model Risk Management, many firms are only interested
in meeting strict regulatory requirements for model risk. It also shows that
many firms view model risk purely as a compliance-based cost, instead of as an
opportunity to improve strategic goals.

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Changes in regulation have
spurred some of the recent developments, particularly the U.S. regulatory
capital rules for market, credit, and operational risk based on the framework
developed by the BCBS which is continuously increasing the number of models
used across the organization. Hence, model inventories has become more
complicated and widespread to ensure holistic view of all models which contains
critical information of each model and how business is derived, validated and
applied.

 

Model Inventory is a key to build a successful model risk governance
framework

Building model inventory is key
part of the model risk management. A model inventory is a single repository of
models used across lines of business in the organization. Banks should have
complete inventory of all existing models, with an aim to facilitate model risk
governance and management and to keep record of all uses, changes and approval
status of each model. Key aspects of model inventory is the accountability of
models means who is the ultimate responsible for controls, compliance and
oversight of the models identified in the inventory. It is a synergistic view:
looking everything in relation to the models from a single point of view.

 

Automate model inventory using workflow engine

With the significant increasing
number of models and growing demands to manage model risk governance framework
effectively, it’s time to adopt the right approach to build the robust model
inventory. Managing and leveraging your model inventory to optimal effect means
fully understanding its complexity, as well as the various change processes
that will impact it.

Using Effective automated
workflow management, bank can maintain a robust model inventory and the
workflow automation have the ability to develop new workflows and enhance the workflows
as per organization’s requirement. It provides notifications and alerts for
each stage of the process to various stakeholders like Model Owner, Model Risk
Officer and Model Risk Management Team.

Example: Automation of Model Risk Governance
Workflow processes

 

 

 

Modules

Description

Sample Data Attributes

Final Outcome

Model Onboarding
 

Add new model/potential
model in the inventory with valid model status.
 
Model Approval – Model approval
initiates once model will be added in the inventory as per the current status
of model.

o    Model Name
o    Model Intended Use
o    Model Status: Implemented,
Under-development or Recently Retired
o    Model Purpose and products
mapped with model assumptions
o    Model Limitations
o    Model Outputs
o    Restricted Usage
o    Model Owner Name
o    Developer Name
o    Date of Creation

New Model with unique
model ID

Model Assessment

Assessment of model
implementation is used for giving rating/scoring to a model

o    Model Risk Rating/ Tier Rating
o    Model Risk Appetite
o    Residual Risk
o    Threshold Limit

Model Risk rating
Model Risk Incidents
 

Model Validation

Automatically system will
trigger validation workflow as per next review and validation dates.

o    Last Validation Date
o    Next Validation Date
o    Validation Frequency
o    Validation Manager
o    Is Model Validated flag

Model Validated – Yes/NO
Validation Dates
Validation Report
 

Issue and Actions

Effective Issue and Action
workflow to resolve and close out issues as per criticality.
 

o    Issue ID
o    Mapped to Model ID
o    Issue Desc

Issue and Actions database
linked with model

Reporting

Report will be generated
in model inventory based on owner, functions, risk type, departments, risk
criticality etc.

o    Dashboard View
o    Reports
 

Dashboard view and report
generated based on various parameters.

All above processes are workflow enabled with adequate
controls and documentation. All change logs are maintained with proper
documentation and timestamp comments.  

 

 

Dashboard View of organization Risk Profile across all
risk types