Model risk management – Special report 2019
A spectre is haunting Europe – the spectre of model risk. Launched in 2016, the European Central Bank’s (ECB’s) Targeted Review of Internal Models (Trim) has forced a step-change in attitudes among European lenders towards ensuring their capital models are fit for purpose. In keeping with other regulators worldwide, the watchdog’s team of inspectors is visiting banks to check everything from internal governance processes to the data inputs that underpin modelling assumptions.
If the early evidence from the review is anything to go by, banks still have significant work to do to get their houses in order. The latest set of findings, on the safety and soundness of banks’ market risk models, landed in April – and made for grim reading. Of 30 banks that had been subjected to supervisory visits, the ECB found, on average, 32 issues with modelling practices – with, on average, nine issues deemed severe.
The review is already proving costly to lenders – and not just from a compliance point of view: ABN Amro cited changes made to its modelling practices as driving a €1.3 billion jump in credit risk-weighted assets during the first quarter of this year – implying the regulator thought its models were not adequately gauging the credit risk in its loan portfolios previously, necessitating a top-up.
The ability of machine learning models to read great quantities of unstructured data, spot patterns and translate it into actionable information is driving a significant uptake in the technology. David Asermely, SAS MRM global lead, highlights the need…
Bayesian analysis can replace forest with a single, powerful tree, writes UBS’s Giuseppe Nuti
Although most banks are progressing rapidly towards a certain standard in MRM practices, the rate of progress is uneven and so are the ambition levels. Management Solutions provides a summarised overview of the state of MRM evolution and how banks are…
Decades, not years, of credit losses required for accurate risk modelling, argues expert
Financial institutions have been maturing their approaches to MRM and – as models become more complex and pervasive, and regulatory expectations continue to increase – leading financial institutions seek faster and further movement. Ashutosh Nawani, head…
Over two-thirds of fair value assets priced using banks' models
Supervisors drive banks to seek more corporate default data and cost-effective model improvements
As models of all stripes crowd into finance, the people who screen them form an association
There is no concord on how banks should police their model risk. But two Fed economists have an idea