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Articles Tagged with: Commercial Banks

Commercial Bank: CECL Model Validation

A commercial bank required an independent validation of its CECL models. The models are embedded into three platforms (Trepp, Impairment Studio and Evolv) and included the following:

  • Trepp Default Model (Trepp DM) is used by the Bank to estimate the PD, LGD and EL of the CRE portfolio
  • Moody’s ImpairmentStudio – Lifetime Loss Rate (LLR) Model is used to calculate the Lifetime Loss Rate for the C&I portfolio
  • EVOLV – Lifetime Loss Rate (LLR) model is used to calculate the Lifetime Loss Rate for Capital Call and Venture Capital loans within the Commercial and Industrial (C&I) segment, Non-rated Commercial loans, Consumer as well as Municipal loans
  • EVOLV – Base Loss Rate (BLR) model is used to calculate quantitative allowance for 1-4 Family commercial loans and Personal loans for commercial use within the C&I segment Residential loans, HELOC and Indirect vehicle.

The Solution

Because the CECL models are embedded into three platforms, RiskSpan conducted an independent, comprehensive validation of all three platforms.

Our validation included components typical of a full-scope model validation, focusing on a conceptual soundness review, process verification and outcomes analysis.

Deliverables 

RiskSpan was given access to the models’ platforms, and workpapers, along with the models’ development documentation, and weekly Q&A sessions with the model owners.

Our review evaluated:

i. the business requirements and purpose of the model, and the metrics that used by the developer to select the best model and evaluate its success in meeting these requirements will be judged.

ii. the identification and justification for

  (a) any theoretical basis for the model structure;

  (b) the use of specific developmental data;

  (c) the use of any statistical or econometric technique to estimate the model; and

  (d) the criteria used to identify and select the best model among alternatives.

iii. the reasonableness of model-development decisions, documented assumptions, data adjustments, and model-performance criteria as measured at the time of development.

iv. Process verification to determine the accuracy of data transcription, adjustment, transformation and model code.

RiskSpan produced a written validation report detailing its validation assessments, tests, and findings, and providing a summary assessment of the suitability of the models for their intended uses as an input to the bank’s CECL process, based upon the Conceptual Soundness Review and Process Verification.


Regional Bank: AML/BSA Model Validation

A large regional bank required a qualified, independent third party to perform risk-based procedures designed to provide reasonable assurance that its FCRM anti-money laundering system’s transaction monitoring, customer risk rating, and watch list filtering applications were functioning as designed and intended.

The Solution

RiskSpan reviewed existing materials, past audits and results, testing protocols and all documentation related to the bank’s model risk management standards, model setup and execution. We inventoried all model data sources, scoring processes and outputs related to the AML system.

The solution consisted of testing each of the five model segments: Design and Development; Input Processing; Implementation; Output and Use; and Performance.

The solution also quantified risk and exposure of identified gaps and limitations and presented sound industry practices and resolutions. 

Deliverables

  • A sustainable and robust transaction monitoring tuning methodology, which documented the bank’s approach, processes to be executed, frequency of execution, and the governance structure for executing tuning and optimization in the AML model. This included collecting and assessing previous regulatory feedback.
  • A framework that included a formal, documented, consistent process for sampling and analysis procedures to evaluate the ALM system’s scenarios and change control documentation.
  • A process for managing model risk consistent with the bank’s examiner expectations and business needs.

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