Our advisory services include assisting you in identifying and mitigating the complex risks associated with the development, deployment, and maintenance of models used for risk management and regulatory reporting purposes.
We assist with the following
a. Review and enhancement of model governance structure
b. Rating model landscape identification
c. identifying the materiality of the models and ensuring the oversight is proportional to the materiality.
c. Model documentation
d. Ensuring Data integrity which includes a review of matching the modeling data set to the source system data and validating the intermediate steps for dataset creation
e. Lastly, we assist in independent model performance validation. Details are provided below
Models used for risk estimation need to be validated on an annual basis. In order to validate credit risk models, we comprehensively review the structure, calibration and operation of internal models and systems.
- We analyze the current structure and methodologies used by the bank and benchmark them against Basel standards and industry best practices
- Analyze the effectiveness of the models, perform sensitivity analysis of variables within the models and recommend changes to enhance effectiveness
- We use various statistical techniques to evaluate the discriminatory power of rating models, including all of the recommended tests in the Basel Council for Banking Supervision Working Paper 14. Templates are also provided by us so that the bank can perform the validation tests on its own.
- Cumulative Accuracy Profile (CAP) methodology, and its summary Accuracy Ratio
- Brier Score
- K-S Test
- We test the efficiency of model calibration with techniques like
- Chi – Square Tests
- ‘Traffic Lights Approach’
- Our approach towards LGD and EAD model validation are in line with leading market practice and Basel regulatory requirements