This one-day training seminar covers the key aspects relating to model risk management as practiced by leading financial institutions. The course addresses common issues of model design inadequacy, parameter flaws, interpolating and bootstrapping errors, as well as reliance on back testing of out-of-sample data sets from a practical viewpoint.

We will also address issues of regulatory compliance and governance, policies, and controls from a functional perspective with respect to model risks in banking. The course will reference the Interagency Guidance on Model Risk Management from the Federal Reserve and Office of the Comptroller of the Currency (OCC) issued earlier this year.

Who should attend

• Auditors (internal/ external)
• Industry Regulators
• Credit and Market Risk Managers
• Risk Controllers
• Finance Department
• Compliance Officers
• Those responsible for delivering the Basel II and Basel III regulation

Course Outline

• Introduction of model risks and illustration of severe losses resulting from inadequate use of models in banks
• Key Sources of Model Risk
• Fundamental Issues:
  • Organization of Model Risk Management Unit (Best Practices)
  • Audit vs Validation
  • Documentation
  • Role of External Auditors
• Key Illustration Case Studies: Internal Rating Models and Challenges
  • Calibration to Rating Agencies Models (PDs)
  • Validation Issues
  • Reliance on Spreads and other Market Data
  • Reliance on Historical Back Testing
• Pricing Models and Risk Sources
  • Mapping to Risk Factors
  • Wrong & Corrupt Datasets on Key Parameters: rates, volatilities, ETF values, etc.
  • Interpolation and Bootstrapping Errors
• Market Risk Models
  • Errors resulting from dimensionality reduction
    • Cholesky Decomposition
    • Eigenvalue-eigenvector Analyses
  • Market Liquidity Concerns
    • LVaR; Liquidity at Risk; Stress VaR, expected shortfall (CVaR) & other mitigating measures
  • The Role and Value Added of stress Testing
  • Governance, Policies, and Controls – Best Practices
  • Group Discussion