ICAAP models : Model inventory and multi-year model validation plan

FOCUS ON: Case studies,

The client is one of the largest financial institutions in France. It offers its clients a wide range of products and services: savings, investment, treasury, financing, insurance and investment solutions.

THE CHALLENGE

Following an ECB on-site inspection dedicated on the Group’s ICAAP, many findings pointed out the necessary areas of improvement of ICAAP models but also the lack of independent validation of key Pillar 2 models. In addition, the ECB concluded that the bank did not have sufficient quantitative capabilities or resources to properly conduct independent validations of these models. To address these shortcomings and as a first step to an effective Model Risk Management Framework, the client decided to develop an inventory of all ICAAP models in order to score them and define the key priorities in terms model validation for the following years.

APPROACH AND SOLUTION

Avantage Reply supported the bank in the implementation an action plan to address the shortcomings of the ICAAP validation process. This was done through conducting a number of methodological workshops in order to:

Define what could be considered as an ICAAP model to identify all internal models that needed to be included in the new independent validation scope
Design a granular ICAAP model inventory
Build a model scorecard which could be used to score and rank the models considering the key steps of the model lifecycle
Establish a multi-year independent validation program
Draft a set model and application inventory procedures to close the ECB’s key findings regarding ICAAP model independent validation

RESULTS AND BENEFITS

At the conclusion of the project, the key benefits and results for the bank were:

The concept of “ICAAP model” was defined and included in the validation process
The scope of ICAAP models to be reviewed by the independent validation function was defined, including economic capital models, stress testing models, ALM models and risk models
A model inventory was established and enriched with a scorecard to rank and tier all models in the inventory
The model validation process was reinforced with the creation of a multi-year independent validation programme for all ICAAP models

RELATED CONTENTS

Case Study

IRRBB – Support the transition of the IRRBB metrics computation tool and reconciliation exercise between both outcomes regarding EVE (Economics Value of Equity) and NII (Net Interest Income).

The Client, a huge international bank, request the support of Avantage Reply to further understand and quantify the differences arising between both of their IRRBB metrics calculators. The first, is a hand-made tool provided by the headquarter and the second is a well-known risk software solution used locally. Avantage Reply helps isolating and assessing each of the differences, and in case of materiality, set processes in order to compute overlays. Avantage Reply further helps to add and validate missing products. Validations cover parametrization of the tool, alinement of IRRBB inputs (margin and reference rate) and models (non-maturing products, prepayment, caps, floors,..)

Case Study

IFRS 9 Control Framework

The customer is a retail belgian bank focusing on mortgage loans and consumer credit. Following the implementation of the IFRS 9 ECL calculator, the need arised to implement a control framework to ensure timely and quality calculation and bookings, and integration in the accounting and reporting platforms. Avantage Reply helped the client bridge the distance between different departments to identify the right responsibilities at the right moment in the process to increase its reliability.