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CCAR: Employing and validating the right models gives a strategic boost

What can financial services risk managers gain by thoroughly validating their stress testing models?

OVERVIEW

Since the advent of Comprehensive Capital Analysis and Review (CCAR), compliance has been a priority, right alongside business strategy, competitiveness and risk management.

With every review cycle, compliance standards are enhanced. Stricter stress testing standards have posed challenges, particularly for bank holding companies (BHCs), around testing and validating their stress testing models.

Having the right models in place—and validating them properly—is vital. Our paper, Comprehensive Capital Analysis and Review: Industry Practices in Model Validation, can help BHCs build and test strong stress testing models, saving them from the risk of failure—but also giving them a crucial competitive advantage.

“…compliance that is well integrated with risk and business strategy can be a differentiator, separating leaders from the rest.”

DOWNLOAD REPORT: COMPREHENSIVE CAPITAL ANALYSIS AND REVIEW—INDUSTRY PRACTICES IN MODEL VALIDATION [PDF]

KEY FINDINGS

The Federal Reserve System has set forth expectations around stress testing models and their validation. Those expectations leave no stone unturned—every phase of the model development life cycle is subject to some form of review.

Consequently, we recommend tapping a model validation framework that is comprehensive and touches on every stage of development.

Accenture’s model focuses on two priorities:

  • Taking an independent view on model validation

  • Adhering to a transparent, repeatable and conceptually sound framework

The model’s five steps include:

  • Documentation review

  • Assessing data quality

  • Assessing model methodology

  • Outcome analysis

  • Governance and ongoing monitoring

Effective validation means providing an independent view and using a transparent, repeatable and conceptually sound framework.

For loss and pre-provision net revenue (PPNR) models we suggest considering both quantitative and qualitative reviews. PPNR models might skew more toward a qualitative review, while the opposite is true for loss models.

Further, when vendors are in the picture, consider taking steps to facilitate vendor model validation.

Recommendations

Standards around stress testing are strict—more so for BHCs and especially for those that are increasing the size and scope of operations.

BHCs that can surmount the challenge, though, are in a strong position. By choosing the right models and validating them correctly, they gain several strategic benefits, in addition to cost reductions, reduced model risk and better insight into risks hidden throughout the business.

Instead of facing stringent stress testing requirements with fear and concern, BHCs can seize an opportunity to allow for viable stress testing, and gain a strong competitive advantage, by meeting model validation and stress testing requirements head on.

DOWNLOAD REPORT: COMPREHENSIVE CAPITAL ANALYSIS AND REVIEW—INDUSTRY PRACTICES IN MODEL VALIDATION [PDF]