Challenges and opportunities of model risk reporting

Challenges and opportunities of model risk reporting

By Herman Graaff, Head of Model Validation, de Volksbank

Interview ahead of the Model Risk Management Europe Summit
Can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

Since January 2018, I have been working as Manager Model Validation at de Volksbank. My team is involved in the validation of all models within our bank and coordinates the Model Risk Management process within the bank. I have a background in Civil Engineering, however I switched to the financial sector in 2013 due to my curiosity about the developments in this sector and worked within the risk department of de Volksbank for Model Validation and Capital & Liquidity Risk.

What for you are the benefits of attending a conference like the Model Risk Management Summit and what can attendees expect to learn from your session?

Within the bank, we are continuously striving to adopt new regulations into our validation practices in an efficient way. Conferences like the Model Risk Management Summit help to gain industry insights and sometimes offer a benchmark on the level of maturity of our model risk approach.

Why is an adequate multi-risk and compliant MRM framework so crucial for retail banks?

Over the last few years, developments like the introduction of IFRS 9, the supervisory involvement in the TRIM and new regulation on IRRBB and ICAAP / ILAAP have increased the workload of Model Validation significantly. In order to use available resources efficiently, it is important to be flexible in defining model management requirements for each model types. At the same time, supervisors expect that any differentiation in internal processes are made transparent. This requires a clear design of the model risk management process and a proper embedding in policies, risk reporting and decision making.

In your opinion, what key considerations need to be made when embedding the validation function within the three lines of defence?

The organizational position of model validation may not result in doubts on the independence of the validation function from departments which are responsible for modelling or fulfil the ownership of the model. When such responsibilities are embedded within the 2nd line for important models, it is important to ensure that escalation is possible to a sufficient senior level.

What are the challenges and opportunities of model risk reporting and how can we overcome the implications?

Model Risk reporting needs to be sufficiently specific to be meaningful and at the same time understandable at senior level. This means that the complexity of information should be limited. The monitoring of indicators enable to detect progress (or deterioration) during time. When specific serious issues require attention from senior management, focus could be placed on the financial or reputational consequences of the issue and the obstacles the business faces to remediate the issue. An opportunity of model risk reporting is that when well-chosen breakdowns are provided, large transparency can be provided about the departments where progress in model improvement is facing delays. Such information is usually not included in overall risk reports.

How do you see the impact of Model Risk evolving over the next 6-12 months?

Intensive supervisory attention on effective model risk management procedures will remain in place, and will expand to new areas for which new regulation becomes effective in 2019 and 2020.

Meet Herman Graaff at…

Sign up for your free Risk Insights account: