How You Can Demystify Model Risk Management
-
Upload
colleen-beck-domanico -
Category
Economy & Finance
-
view
90 -
download
1
Transcript of How You Can Demystify Model Risk Management
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
1
JOIN. ENGAGE. LEAD.
HOW YOU CAN DEMYSTIFYMODEL RISK MANAGEMENTA Banker’s Guide to Implementing a Model Risk Management Program
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
2
JOIN. ENGAGE. LEAD.
COMMON START-UP CHALLENGES
“Getting Started” Challenges
Short timeline to define, staff, and operationalize a model risk
management capability.
Limited organizational understanding of the underlying
requirements and value proposition.
Policies and procedures that are not fully defined or
rolled out.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
3
JOIN. ENGAGE. LEAD.
COMMON MODEL RISK MANAGEMENT PROGRAM ISSUES
Execution gaps could add to the start-up challenges, for example:
Model risk expertise may not be internally available.
External relationships may not have been formed.
The bank has no assessment of individual model risk or aggregate model risk.
Limited understanding of roles and expectations: model group, governance groups, model owners, developers, and users.
Some independent model validations exist, but not to “new” standards.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
4
JOIN. ENGAGE. LEAD.
INITIAL FOCUS FOR THE MODEL RISK MANAGEMENT TEAM
1Build the model risk management policy, assessment approach, model validation plan, and schedule.
2 Communicate and educate on the Model Risk policy and expectations.
3Gain board and executive buy-in.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
5
JOIN. ENGAGE. LEAD.
5 EARLY ACTIONS
1Establish top-down support promoting managing model risk as “just good business.”
2Onboard credible and skilled staff and partners that balance influence and authority.
3Leverage a “burning platform” to demonstrate value and success.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
6
JOIN. ENGAGE. LEAD.
5 EARLY ACTIONS (CONT.)
4Position model risk management as an enabler of business strategy, not an obstacle, roadblock, or checklist item.
5Engage existing model experts in the governance process to promote ownership.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
7
JOIN. ENGAGE. LEAD.
OVERCOMING LEGACY ISSUESChallenges you will likely face:
Defining the “model” box and overcoming historical perception.
Dealing with existing deficiencies (e.g., documentation, validations, and understanding).
Working with model experts that never had someone “checking” them.
“Funding” the efforts required to catch-up on documentation, validations, etc.
Establishing an effective Model Validation Grading system (FYI - A,B,C,D has a history to overcome).
7
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
8
JOIN. ENGAGE. LEAD.
IMPLEMENTING CHANGEChallenges you will likely face:
Providing effective challenge while building relationships.
Assessing standalone and aggregate enterprise model risk exposure.
Maintaining independence while striving to reduce model risk.
Establishing an active model change process to update risks and support planning/re-planning.
Allowing time to educate and improve model risk awareness.
Ensuring validation findings are addressed in a timely and complete manner.
8
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
9
JOIN. ENGAGE. LEAD.
GET SUPPORT AND BUY-IN
With support and buy-in, the Model Risk Management team can focus on 1) the key success factors and 2) executing against the model validation plan and policy.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
10
JOIN. ENGAGE. LEAD.
KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM
1Establish a basic foundation and some fundamentals… but GET STARTED quickly.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
11
JOIN. ENGAGE. LEAD.
KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM (CONT.)
2Be practical and recognize that it will be a learning and iterative process.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
12
JOIN. ENGAGE. LEAD.
KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM (CONT.)
3Set a plan, run hard, communicate, and hold yourself accountable to the plan.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
13
JOIN. ENGAGE. LEAD.
KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM (CONT.)
4Establish an effective quality assurance process, especially if you are relying on external model validators.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
14
JOIN. ENGAGE. LEAD.
KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM (CONT.)
5Balance the focus on model development accountabilities, governance, and model validation efforts.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
15
JOIN. ENGAGE. LEAD.
KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM (CONT.)
6Quickly operationalize and leverage the model risk governance committee: expertise, buy-in, advocacy, communication, and distribution.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
16
JOIN. ENGAGE. LEAD.
Model Owners andDevelopers
Model Validation
Group
Model
Validation Plan
& S
cheduleOperational Risk Committee
Mod
el R
isk
Mgm
t Pol
icy
Model Documentation
Report Validation Findings, Remediation
Accountability
for Model R
isk
Board Risk Committee
Mod
el R
isk
Ass
essm
ent
Executive Risk Committee
Model Risk Management Process
ESTABLISHING A MODEL RISK GOVERNANCE STRUCTURE
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
17
JOIN. ENGAGE. LEAD.
EFFECTIVE MODEL RISK PROGRAMS
To build an effective model risk management program for your bank, you should:
Allow time to educate and improve model risk awareness.
Provide effective challenge while building relationships throughout the organization.
Establish an active process to update risks and support planning/re-planning.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
18
JOIN. ENGAGE. LEAD.
INITIAL DEVELOPMENT PLAN• Create a reliable model inventory.1• Develop and approve model risk management policy
(through board).2• Establish model risk governance committee.3• Improve associate readiness: implement policies and
procedures; communicate to businesses. 4• Perform risk assessment process for all models in the
inventory.5• Prioritize models for validation.6• Develop risk-based model validation plan and schedule.7• Establish model validation group.8
18
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
19
JOIN. ENGAGE. LEAD.
EXAMPLE OPERATING PLAN
Enhance model risk and validation
policies/procedures.
Formally refine model inventory
annually based on assessment.
Evaluate model validation staffing, competency, and funding plans.
Conduct model documentation
“catch-up” efforts with model/business
owners.
Refine model risk reporting including status, decisions,
risk levels/exposure, escalation, etc.
Expanded business owner and model
owner education and awareness.
Execute, monitor, and refine
established model validation plan
Operate, evaluate effectiveness, and refine model risk
management process.
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
20
JOIN. ENGAGE. LEAD.
RMA’s Operational Risk/ERM Audio Conference Full Series features the industry’s latest trends and insights from expert practitioners.
To learn more, visit: https://www.rmahq.org/meetingdetail.aspx?productid=270082725
For more insights, check out RMA’S Operational Risk/ERM Audio Conferences
Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending
21
JOIN. ENGAGE. LEAD.
SHARE THIS PRESENTATION
Visit http://www.rmahq.org for information on risk management
RMA is a member-driven professional association whose sole purpose is to advance sound risk principles in the financial services industry.
RMA helps its members use sound risk principles to improve institutional performance and financial stability, and enhance the risk competency of individuals through information, education, peer sharing, and networking.
Become a member today.