The Office of the Comptroller of the Currency (OCC) set forth guidance on model risk management in April of this year.
Model validation is the set of processes and activities intended to verify that models are performing as expected and in line with their design objectives and business uses. Financial institutions must ensure models have a strong framework, increase resources devoted to risk modeling management, conduct internal audits, and ensure comprehensive documentation. All model components should be subject to validation, which applies to models developed in-house as well as those purchased from vendors. People who are not responsible for development or use and who do not have a stake in whether a model is determined to be valid should conduct the validation.
The guidelines require banks to have a model owner responsible for developing, running, and updating it; a risk control person or group to look at risk around the model; and a compliance officer to oversee these two roles. The guidelines require an annual review of models be conducted and a process for regular monitoring be developed. Many of the activities addressed in the guidelines are common industry practice, but all banks should confirm that their practices conform to the principles in this guidance. Banks should ensure they maintain strong governance and controls to help manage model risk.
Baker Tilly insights
Enterprise risk management remains an elusive target for financial services companies. Although embraced by most boards and executive management teams, and mandated by bank regulatory agencies, what this actually looks and feels likes remains undefined. Financial services companies will continue to attempt to effectively articulate the comprehensive risk within their organization. The absence of a common enterprise risk management platform will reduce the comparability of these assertions to a low level at best. There is no doubt that more time and effort will be dedicated to the pursuit of practical and effective measures of enterprise risk; however, we expect the development of a common equation to be well into the future.
