Perspectives on Credit Risk Model Development from Recent CCAR Validations

FI-Blog-lessonsAt FI Consulting, we develop, validate and implement a wide variety of credit risk models for GSEs, banks, credit unions, and Federal agencies across residential and commercial real estate, small business and consumer portfolios. In terms of model validation, clients often look to us for surge support to temporarily increase their capacity during crunch periods leading up to supervisory reviews and other audits. Stress testing, particularly CCAR, has represented a significant amount of our validation work.

We perform model reviews that look at all aspects of the modeling environment including data, input assumptions, model theory, mechanics, model use, policies, regulations, controls and documentation. In most instances, we work within our clients’ own model risk frameworks and use their specific templates, tools and reporting formats while bringing our own knowledge of leading practices to bear.

After a recent wave of model validation work, the FI team convened to conduct our usual review of lessons learned and from the discussion came a list of findings that came up across many projects. The good news is that most of these are easy to address and will help you avoid unwanted validation issues. Take a look and consider whether you have them covered as you develop your next model!

A model is only as good as its data…

Regarding missing values…

Even a statistically grounded model contains qualitative judgments…

Testing…