on model validation to stop it from going stale
11 March 2019
In this blog, Tom Durkin and Neil Gedalla share three essential ways to look at your established validation programme to ensure that it stays effective year-on-year.
- Strategic view – how does your validation support model use by the business and, in turn, your wider strategy
- Technical view – what are your key remaining modelling challenges, and is your validation robust under regulatory fire
- Resource view – how can you reduce time spent on low value activities and how can you ensure clear independence?
Here, we explore how each of these views brings its own valuable perspective.
1. Strategic view
Where models are used across the business, it is critical that the validation process identifies these disparate uses and covers each of the relevant model results in the validation testing.
To make best use of the strategic view, keep focused on how the modelling helps the business. Ask questions such as:
- Clear objectives – does your validation process clearly consider your firm’s strategic objectives and provide assurance on how the model supports each key decision?
- Understanding – how does your validation highlight limitations and approximations in the modelling and ensure that these are front of mind when the model results are being used?
- Key performance indicators – does the validation consider a range of metrics, from capital setting through to short term earnings volatility?
2. Technical view
Effective validation continues to scrutinise the technical modelling approaches and considers alternatives. This ensures that your modelling best reflects your firm’s business and risk profile, and that your model remains robust under regulatory fire.
To make best use of the technical view, periodically re-examine your key model design decisions. Ask questions such as:
- Technical challenges – how well are you dealing with complex technical challenges, such as dependencies and modelling emerging risks?
- Management actions – how well do you capture potential future management actions within your model, such as strategic changes to your medium and long-term business plans?
- Regulator focus – do you minimise the risk of having to produce additional work to satisfy the regulator during your busiest periods of reporting?
- Active model development – what action should you take now to address any remaining issues with your modelling?
3. Resource view
The third view helps make effective use of your available resources, to ensure the validation process is efficient and also that it continues to demonstrate clear independence.
To make best use of the resource view, focus on your validation team and how it interacts with the wider business. Ask questions such as:
- Rotation – how can you best structure your year-by-year plan to maximise time spent on the most important issues for your business?
- Automation – how can you streamline the validation process, to help your validators focus on insights from the modelling rather than handle-turning?
- Independence – how do you keep your validation team sufficiently separate from the model development and operation?
- Timescales – which elements of validation could you perform “off season”, to minimise disruption at busy times?
Looking at your validation programme from each of these perspectives is an effective way of keeping your approach fresh and fit for purpose for 2019 and beyond.