Model risk is a threat to an institution’s business performance because wrong guidance from an inaccurate model can lead to lost opportunity or unforeseen exposures. The potential exposures are also a threat to the deposit insurance fund as a devastatingly large loss could imperil an institution’s capital.
Analyzing and assessing the degree of model risk requires complete independence, high levels of modeling expertise and experience, and the comprehensive means to prove out both the model’s potential to accurately capture and forecast balance sheet behaviors and its genuine capabilities to attain those goals.
MPS ALM model verifications deliver maximum levels of regulatory compliance and business confidence because they are produced by a fully independent third party and provide comprehensive assessments of model risk. The model is first verified – to prove that underlying data, category set-up, contractual inputs, and behavior assumptions can theoretically produce accurate forecasts. The model is then also validated - detailed diagnostics prove that the model actually does produce accurate forecasts. Reviews of ALCO processes and policies, data audits, and other model-related elements are available.
Comprehensive MPS ALM model verifications meet all requirements for model risk assessment as delineated in the FDIC’s recent Supervisory Insights (Winter 2005) article on Model Governance. They also meet the requirements defined in OCC Bulletin 2000-16, the current guiding directive on ALM model verification for national banks, and mandates outlined in various other regulatory directives.
MPS verifications are also available for other financial models, such as mortgage pipeline and strategic planning tools.