Models are essential to most financial institutions. They are used for measuring risk, regulatory scenario analyses, valuation of assets/liabilities and for decision-making purposes. However, model risk is a serious issue. Many things can go wrong with a model:
Most are based on specific mathematical models, which depend on a wide range of assumptions. If these assumptions are not valid the model can produce the wrong results
The math may be valid, but it may not have been implemented correctly
Data can be incorrectly entered
Perhaps the biggest issue for models is that there is often no independent assessment on the results of the model.
It is no surprise that the best financial institutions have invested in risk mitigation strategies which include model risk management (MRM) processes and subject their critical models to detailed scrutiny. Regulators increasingly mandate formal MRM policies. The Federal Reserve and Office of the Controller of the Currency (OCC) issued Rule SR11-7 in 2011. The Canadian OSFI is bringing out a standard in 2017.
Supervisory Guidance on Model Risk Management, also known as SR11-7, demands that all models are clearly defined initially. There should be robust development, implementation and documentation in creating them. The quality of the data used in the models should be rigorously and continually assessed and validated to identify errors and when changes are made.
There are several challenges to complying with SR11-7 – not least how to validate and control model data which is often located in complicated spreadsheets.
Risk mitagation strategies to help you manage model risk
Finsbury Solutions is a global leader in helping financial institutions mitigate model risk and meet requirements such as SR11-7, when using spreadsheets as part of the modelling process.
We provides best practice advice and leading spreadsheet model risk mitigation tools that will help you:
Reduce the gaps in your model validation processes
Free up valuable time for resolving rather than detecting model issues
Demonstrate to regulators that you have an organized and structured approach to model risk
The benefits of our spreadsheet model risk mitigation solution include:
Significant reduction in time to validate a model
Detailed documentation on validation performed
Control framework with detailed analytics, version history and audit trail
And much more
For more details on the benefits and features of our spreadsheet model risk validation solution click here or contact us directly to discuss your companies’ needs.