Establishing a clear inventory of operational risk models for effective validation and controls

Establishing a clear inventory of operational risk models for effective validation and controls

By Saqib Jamshed, Director – Quantitative Risk Analytics, State Street Corporation.

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

I’ve spent more than two decades in various programming, risk management and trading roles on Wall St. I am currently situated in the model risk team at State Street Corporation. It is a very exciting time as Artificial Intelligence and Machine Learning applications are rapidly being developed and deployed in various business areas in the financial world.

What, for you, are the benefits of attending a conference like the ‘Operational Risk Management USA Congress’?What can attendees expect to learn from your session?

Conferences like the ‘Operational Risk Management USA Congress’ allow you forge new connections and stay abreast of the latest developments in the Operational risk space. Areas like cyber risk and model risk are gaining more importance inside financial organizations and these conferences allow you to get the latest thinking on the subject from practitioners as well as regulators.  It is good to get away from the office once in a while and learn from your peers and their experiences.

What are they key benefits of establishing an inventory of existing operational risk models? What is the most effective way to do this?

“What doesn’t get measured, doesn’t get fixed!”. The FRB publication SR 11-7 requires that an inventory of all models with associated attributes be developed and maintained. Operational risk models have to be inventoried and then validated for that reason. Organizations have tried to meet that goal using different approaches such as by business unit or functional area. We’ll delve into more details on the subject in my presentation.

 In your opinion, how should an operational risk model be defined to avoid grey areas and uncertainty, and what impact does this have on inventory and treatment for risk reporting?

Operational risk models have evolved in the last couple of years in the light of changing expectations from the Regulators. Organizations that developed tightly coupled and integrated models to account for various operational risk scenarios have realized that a more modular approach may be a better option. It may end up increasing the size of the inventory and the corresponding validation burden but the trade-off is well worth the effort.

How do you see the risk landscape evolving over the next 6-12 months?

The focus will stay on market and credit risk in the near term. Further loosening of regulations from various regulators also seems to be on the cards. The next crisis is never the same as the previous one. We have to stay vigilant and focused and try to spend as much time preparing for the next contingency as we spend trying to forecast one!

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