Defining and managing qualitative models

Defining and managing qualitative models

By Ximena Zambrano, Head of Qualitative Model Validation, Wells Fargo

Can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I have been a risk manager for over 20 years with particular focus on credit risk, analytics and model lifecycle management. I have had experience with consumer and commercial products and portfolios in the United States, Latin America and Europe. Currently I head Qualitative Model Validation for Wells Fargo and over the last year have been focusing on setting up and executing on our Qualitative Model Program.

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

You will hear about the key considerations when building a comprehensive Qualitative Model Program, key differences vs quantitative models and approach to documenting and validating these types of models.

You will be presenting at the upcoming Risk Americas 2019 to discuss qualitative models. Why is it so important for financial institutions to get it right?

Banks widely use qualitative models across many functional areas and used for diverse purposes.  Like with quantitative models, every time they use qualitative models, they introduce risk, often times significant risk; however unlike quantitative models, the processes for classifying, documenting and validating these models are just being defined or are new to the financial Industry.

While there are many common elements to quantitative and qualitative models, simply copying the existing practices for quantitative models may result in inadequate assessment and challenge of the risks posed by these models. As Banks put together their Qualitative Model programs, it is a good opportunity to do so thoughtfully and considering the inherent differences vs quantitative models.

What are the key challenges of managing qualitative models?

Managing qualitative models under model risk management rigor and principles is a new practice in the Industry, so the benefit of experience and common knowledge is still not there. Qualitative models, where judgement is used for key modelling choices ,create interesting challenges like how to:
•          Provide a reasonable structure to manage a process that is often seen as unstructured,
•          Define a Qualitative model program that rigorous enough to address the risks these models pose, but keeps a risk commensurate balance,
•          Validate modeling choices made based on judgement

What steps do you need to take to successful deploy a  qualitative models program?

These programs are still new to the industry, and as such will likely transform as they mature, however, like all significant programs in large financial institutions, a qualitative model program will need to have companywide presence, senior management support and a disciplined approach to planning and execution.