Communicator
Archives: December 2001
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Communicator
Archives: December 2001 |
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Model Validation Times change and so do regulatory buzzwords. The current phrase around the banking community seems to be, "model validation." Several questions follow the mention of model validation: What exactly is a model validation and most importantly, who is responsible? Why now? Part 1 of this article will answer these commonly asked questions while part 2 will address the 1996 Joint Policy Statement guidelines for evaluating the risk management process in depth. The OCC and the FDIC insist that an independent review of your model be performed. Why? May we suggest the evolution of the regulatory process. Banks must diligently identify, measure, monitor and control risk inherent in their banking activities. Banks are required to use a modeling system to determine their interest rate risk. The next logical step would be to make certain that the information received from the modeling system is accurate. What specifically does model validation mean? The 1996 Joint Policy Statement requires a bank to annually assess their risk measurement process to ensure its integrity, accuracy and reasonableness. The assessment should evaluate the following five areas:
Who is responsible for the above-mentioned tasks? The burden lies on the banker. OCC bulletin 2000-16 states, "the personnel performing model validation should be as independent as possible from the personnel who constructs the model...For smaller banks the validation policy should provide for as independent a review as practicable." Identify, measure, monitor and control...the bankers mantra in regard to risk management. In order to do this in the most effective manner, bankers must exercise vigilance with the data inputs, processing, methodologies and key assumptions in their risk measurement model. |
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| Regulatory Focus | |||||||||
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ICBA Weekly News 01/02/02 "State-Chartered Financial Institutions Grow Marginally" Maryland's commissioner of financial regulation reports that state-chartered financial institutions grew marginally within the past year. The growth came despite the fact that some lenders struggled with problem loans, including an increase of credit delinquency rates, which were due in part to the slowing economy. The state's 67 financial institutions mentioned in the report showed a 3 percent growth reaching $41.4 billion for the year ending June 30. In addition, the Office of the Comptroller reported earlier this month the economic recession could force banks to set aside up to $40 billion for bad loans, but local institutions seem prepared to deal with a recession. For 2002, the local banking sector will likely continue to expand securities, insurance and trust activities, as well as continue to grapple with credit quality. |
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| Benchmark Briefs | |||||||||
| Fourth quarter processing is just around the corner. As you are reviewing your call report and financial material, please feel free to contact and analyst with questions or concerns about how to model your bank's data in the most effective manner. While we specialize in mathematical information, we appreciate the fact that each of our clients are unique and we will work with you to be sure that our modeling of your data is an accurate reflection of your institution. | |||||||||
| Ask the Expert by Dr. Ronald L. Olson, Chairman ORA | |||||||||
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Q.
How do I get my model validated? A. The bank is responsible for model validation. However, you have contracted with ORA to assist in the assets/liability process that includes assistance on model validation. Beginning in fourth quarter 2001, your Executive Reports will include a five-page section entitled, "Guidelines for Model Validation." This new section is your first step. It is designed to assist you in the process as well as give you an outline of compliance requirements. |
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| Welcome Aboard | |||||||||
| The staff of Olson Research is pleased to welcome these institutions aboard: | |||||||||
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