The challenge of the challenger model

The challenge of the challenger model

Keith banner
Keith, can you tell the Risk Insights’ readers about yourself and your professional experiences?
I have spent over 20 years working directly for or consulting to major US Banks, much of that time spent supporting Model Risk related efforts. Our team at CenturyLink has been actively engaged with multiple clients on various aspects of their CCAR and DFAST programs, including Model Development, Model Validation and Model Documentation.
At the Stress Testing USA Congress you delivered a presentation within the quantitative focus stream, entitled the challenge of the challenger model. Why do you believe this is a key talking point at the Congress?
Development of challenger models represents one component of the “effective challenge” principle of OCC Bulletin 2011-12. To be effective, the challenges made must be carefully considered and systematically evaluated, while utilizing scarce resources in an efficient way. There are benefits and risks to having these challenger models developed by the subject matter experts building the proposed model; likewise there are different benefits and risk associated with independent development of these challenger models. For each model, a firm must balance these benefits and risks when deciding whether challenger models are needed and whom should build those models.
What are the challenges of evaluating during model development or independent review and validation, and what stage should FI’s be aiming for?
While model developers may be better able to articulate the specific assumptions that need to be challenged, they are not truly independent. On the other hand, independent validators may not understand the deep nuances of a model to be able to identify the most important challenges to make. A successful challenger model should strive to objectively test and evaluate key assumptions and ultimately demonstrate that the final model chosen is reasonable.
How can CenturyLink assist organizations to better maximise the effectiveness of challenger model development?
We have deep experience across Model Development, Model Risk Management and Model Documentation for CCAR and DFAST firms alike, and we can leverage that breadth of industry experience to ensure the firm’s approach is reasonable.
How do you see the role of the stress professional changing over the next 6-12 months?
The success that many firms have had with their CCAR submissions has been driven by a “whatever it takes” mentality. Financial Institutions are already making investments to make the processes associated with model development and scenario execution more streamlined and less manual. For the professional in this space, the pressure to satisfy regulators should feel less daunting, and so practitioners will be able to focus on designing a longer term view of their Stress Testing process and procedures, and from there focus on what is repeatable and robust in both the development and the execution of their models.

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