Regulatory Compliance : ALM Model Certification

An ALM model is complex and ever changing.  To have confidence in its applications, complete confidence is necessary in the model’s ability to capture and forecast all balance sheet behaviors.

The basis for all model capabilities is its fundamental functionality – the ability to intake, process, and properly forecast or value balance sheet data.  Certification of those fundamental capabilities is provided in the MPS ALM Model Certification Report.
The MPS model certification is based on two pillars:  (a) the findings of a technical verification of the model’s potential capabilities to model and correctly forecast balance sheet behaviors and (b) validation of the model’s actual capabilities to accurately forecast such behaviors.
Verification is based on detailed reviews of category level (a) data definitions and data, (b) set up attributes, (c) contractual inputs, (d) behavior assumptions, and (e) report accuracy.  These establish the theoretical forecast capabilities of the model.  Verification reviews are conducted by examining line-by-line all components of the model that are, or could potentially be associated with modeling category behaviors and producing forecasts.
Validation of model category level forecast data is conducted across multiple types of interest rate scenarios and balance sheet growth patterns.  This empirically proves out the actual capabilities of the model to accurately forecast.  A proprietary MPS diagnostic system and testing procedures are employed to validate parent category level forecasts compared to underlying contract specifications.
The MPS ALM model certification applies only to a model’s fundamental functionality as it relates to category level data, analytical, and forecast functionalities.  Because of the normally high degree of customization that characterizes institution specific model implementations, it does not take the place of a periodic model risk assessment as may be mandated by business and regulatory needs.