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Model Validation - Identifying Issues with Modeling

April 28, 2021

10:00 – 11:00am EDT

3:00 – 4:00 BST

Join SMARTER Risk President John Hurlock as he presents a 1 hour webinar in partnership with PRMIA.

John is a seasoned practitioner of Model Validations. Come and hear about the lessons that he has learned from validating hundreds of models over the last decade, learning important lessons from the issues that others have experienced and apply this valuable information to your own models.

Check it out.

Insights

Articles

Model Validation Changes Under CECL - Moving from Incurred Loss to Expected Loss

Model Validation has been going through a maturing process since the 2011 Interagency Guidance (2011-13) was issued and applied to the Allowance for Loan and Lease Losses (ALLL) model. And because every model is different. There have been some misunderstandings and misinterpretations of what validation means for ALLL.
 
Now moving forward Validation is going to become more robust and complex as it moves from Incurred Losses to Expected Losses. Being proactive makes all the difference when it comes to challenges and surprises. There are certain activities where being boring and predictable in a bad thing…. This is one of them.

ALLL/CECL & COVID-19 - Reserving for Loan Losses During a Pandemic

Until recently determining the reserve has been a fairly straightforward and predictable event. Now as the financial industry enters into a “virus driven” recession. The time has come for Bankers to ask themselves two critical questions. “How do I reserve for this, given all the uncertainty that exists, and the (as of right now) lack of actual losses? And how do I support the reserve decisions I make?”

This article discusses ways to address the reserve over the next few quarters. By reviewing the current situation, what is unpredictable and predictable about it.

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Latest From The Get SMARTER Blog

A Pragmatic Approach to Selecting Risk Modeling Software

Unsurprisingly in this day and age, risk management and risk modeling are booming fields. With that boom, however, comes a whole host of modeling software options that are ever-so-slightly different, along with a large group of vendors trying to convince you that their product is the best fit for your organization. As you might have guessed, though, every single program is not the best program for you, nor is it an easy/simplistic process to determine exactly which one fits.

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AI/ML Ethics – What Will it Take to Trust the Model

Artificial Intelligence (AI)/Machine Learning (ML) and model risk management is a topic I’ve addressed in prior blogs. The image of HAL from 2001: A Space Odyssey and its nefarious actions is burned into many people’s minds as they think about AI. We are far, far away from this concept of AI and, since AI/L is still in its infancy, there are many things to mistrust about it. For many, if not most, people, these methods are black boxes: some data goes in, and some conclusions based on that data come out. A key to moving forward from the use of such tools is to establish the explainability of the model, ensuring that there’s at least a few members of the organization utilizing the technology that understand and can explain the methodology for both internal governance and external regulation reasons.

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AI/ML: The Future of Risk Modeling?

A few years ago, as conversations about using artificial intelligence (AI) in other financial fields took form, risk professionals hoped the new technology would provide an avenue to automate some of the layers of risk modeling, improving the results while reducing the hours required to perform this task. From then to now, however, that aspect of modern technology hasn’t fully matured in financial and risk models. That’s not to say there haven’t been some developments in risk management AI and machine-learning (ML) over the last few years, though.

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Preparing for Climate Risk as a Community Bank

It’s worth separating out the two ideas: risk “weather,” or what to do to handle weather events in the short-term, and risk “climate,” what to do to handle weather events in the long-term. Note that for the purposes of this article, I’m focused more on the space of community financial institutions, and also that “climate risk” is separate from “risk climate” (more on that in a second).

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A Test In Real Time: CECL in 2021

As February 2021 gets off to a start and the continued effects of the pandemic on the economy continue to force us all to ask questions like “what unexpected scenario is going to bring us a new source of risk this month,” it’s worth taking a step back and performing a status check on some of the larger accounting changes from last decade and where they stand now.

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Welcome to 2021 – The Year of Reverting to the Mean

As we enter 2021 we have hope for a better year. There is a perceptible and not just figurative, “light at the end of the tunnel”, with the attention focused on the newly developed vaccines providing the opportunity to vaccinate the vast majority of the world within a very short timeframe. A truly monumental undertaking with a hopeful but unknown outcome. In addition, we have the important concept of reversion to the mean.

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