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SAS Model Risk ManagementSandra Pisco

SAS

[email protected]

Presales

SAS® FORUM

PORTUGAL 2017


MODEL RISKWHAT IS IT AND WHY DO FINANCIAL INSTITUTIONS NEED A SOLUTION?

Model Risk

Incorrect Model

Model Implementations Error

Misuse of Model

Proper Model Risk Management promotes consistency, transparency and efficiency in decision making in modern world !!!

Model Risk is most simply defined as the possible adverse consequences (including financial loss) of decisions based on quantitative models

that are incorrect or misused. It holds great relevance in today’s markets because quantitative models are behind practically all decision-making

in the financial world—from trading and risk, to asset liability management, investment and regulation.


#SASFPT17

REGULATORY GUIDANCE

1997 2000 2002

Federal Reserve

SR11/7

(Apr 2011)

Federal Reserve

“Range of current

practice”

(Aug 2013)

EBA SREP

Guidelines

(Dec 2014)

OCC 2000-16

Risk Bulletin

OCC 1997-24

Risk Bulletin

SOX

2002-404

2011 2013 2014

CONCERNS GUIDANCE REGULATION

Identify, estimate, monitor and manage model risk

Effective challenge and independent reviews

Robust internal controls and effective governance

Setup and maintain Model Inventory

Integrate model risk limits with risk appetite

Comprehensive and sustainable MRM program

Regulatory Expectations

Regulatory Fines

Increased Capital charges

Headline Risk

Non- compliance

Manage model risk like any other type of risk with sustainable systematic processes


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MODEL RISK MANAGEMENT

TRIM - MEETING REGULATORY GUIDELINES GLOBALLY

The Largest Individual ECB Project Ever!

• Objective = Save the internal models!

• Focus on HDP (High Default Portfolios): Retail & SME

• Low DP are not excluded though

• Why? = ECB is convinced that the models…

• Bring an added value to Risk Management

• Are a lever to harmonize risk management practices within

the SSM

• How?

• Definition of harmonized principles: modelling, governance,

supervision

• On-site control missions (Standard format: 6 inspectors during

2 months)

• Message to the banks = You must cooperate accordingly!

• 45000 m/d for the on-site missions / 500 inspectors

• 15% of the SSM budget in 2017

Source: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/trim_guide.en.pdf

ECB

(February 2017)

https://www.bankingsupervision.europa.eu/ecb/pub/pdf/trim_guide.en.pdf


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SAS SUPPORTS… ALL FOUR LINES OF DEFENSE

Model Owners, Developers & Users

Internal & External Audit

Model Risk Governance incl. Validators

Board Level Strategy &

Policy


NO MODEL IS AN ISLAND

Related Model

ReviewsRelated

Documents

Model Stakeholders: owner, developer, validator, MRM

oversight, senior managers, internal audit, regulator

Related

Usages

Related

Models

Related Data and

Variables

Related

Findings

Related Action

Plans

Related Policy

Exceptions

Model

Related

Correspondence


#SASFPT17

MODEL RISK MANAGEMENTPROCESS AND FUNCTIONS

Model

Model Candidate

Assessment Model Inventory

Model Variables

Model Data Sources

Model Development

Model Review and Validation

Model Deployment

Model Usage

Model Performance Monitoring

Model Risk Assessment

Model Change Request

Model Inventory

Attestation

Model Retirement

Model Reinstateme

nt

MRM

Correspondence

Policy Management

Findings

Action Plans

MRM Dashboard

Workflow

Management

Document

Management

Data Management

User and Role

Management

Other System

Administration

Support

FunctionsAdministrative

Functions


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MODEL RISK MANAGEMENTORGANISING A MODEL INVENTORY

Credit Decision

Input Processing Estimates

Statistical Economic

Mathematical

Risk Management

Balance-Sheet

Stress-test

Quantitative

Qualitative


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MODEL RISK QUANTIFICATIONTWO STEPS APPROACH

Inherent Risk :

f(Risk Tier, Validation Rating)

STEP 1: STEP 2:

Inherent Risk and Residual Risk should be defined in a manner consistent with the corporate risk assessment framework

Residual Risk :

f(Inherent Risk, Control Effectiveness Score)


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MODEL RISK MANAGEMENTTRANSPARENCY AND OPTIMIZED PROCESSES IN MRM

• Interactive dashboards for

executive management

• Drill-down into model risk

drivers

• Aggregate model risk across

the firm

• Full integration with Microsoft

Office® applications

• Web based interface to

capture and conduct end-to-

end model lifecycle

• Easy access to model

documents and artifacts

• User entitlement behavior

• Easily configured and

maintained by business users

• Pre-defined industry standard

workflow for each MRM

process

• Automated alert/ notification

dispatcher (real-time / timed)

• Flexible workflows

customizable by point and

click tool