The Validation of Risk Models: A Handbook for Practitioners by S. Scandizzo

By S. Scandizzo

The perform of quantitative hazard administration has reached extraordinary degrees of refinement. The pricing, the evaluation of danger in addition to the computation of the capital standards for hugely complicated transactions are played via both advanced mathematical types, operating on complex desktops, built and operated through devoted, hugely certified experts. With this sophistication, in spite of the fact that, come hazards which are unpredictable, globally hard and tough to regulate. version hazard is a chief instance and exactly the form of hazard that these tasked with coping with monetary associations in addition to these overseeing the stability and balance of the economy should still fear approximately.

This publication begins with surroundings the matter of the validation of danger types in the context of banking governance and proposes a accomplished methodological framework for the evaluate of types opposed to compliance, qualitative and quantitative benchmarks. It presents a accomplished advisor to the instruments and strategies required for the qualitative and quantitative validation of the most important different types of hazard versions, and introduces a pragmatic technique for the dimension of the ensuing version threat and its translation into prudent changes to capital requisites and different estimates.

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Extra info for The Validation of Risk Models: A Handbook for Practitioners

Sample text

6 A note on model documentation The model owner should develop and maintain the model documentation, describing and recording the responsibilities discussed in section 2. The Basel Committee is explicit, if a bit generic, in requiring exhaustive model documentation as a key tool for model risk management. The following is a relevant quote from the Second Basel Accord (BCBS, 2006). The burden is on the bank to satisfy its supervisor that a model has good predictive power and that regulatory capital requirements will not be distorted as a result of its use.

To the greatest extent possible, you want to go to the board with thought-out solutions for approval rather than with a problem to solve. Consequently, it has to be at the same time comprehensive in scope and specific enough to provide the necessary leverage when dealing with the misunderstandings, and inevitably the outright resistance, that you will encounter in the implementation of your model risk management framework. The first step in achieving this goal is to define the key concepts at hand.

In some institutions, this is provided by an escalation mechanism involving the appropriate levels of senior management, while in others, one or more interdepartmental committees are in place to ensure all views are represented, validation findings are clearly understood and timely decisions are taken. All the teams within the bank should provide access to all documentation, databases, computer applications and other information needed for the model validation activities. They should provide advice and explanations on the functioning of the models.

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