The client is one of the largest public development banks in France, specialized in financing the local public sector but also in the refinancing of credit export contracts.
Under the annual SREP exercise, the ECB concluded that the bank did not have sufficient quantitative capabilities or resources to properly conduct either independent model validations or internal audits to challenge the model validation function. Furthermore, the Internal Audit function is required to conduct an in-depth review of independent validation function of market models in order to analyse (i) its governance; (ii) its alignment to both the regulation and to the industry best practices; (iii) the perimeter of the internal models covered and their validation tools; and (iv) the methodologies and documents used.
After this review, the Internal Audit set a list of recommendations that in particular required (i) the redefinition of the internal validation functions and the model’s risk management governance; (ii) the expansion of the coverage towards a wider range of internal models, and (iii) the regularization of the validation process through a multi-year validation programme.
To address these shortcomings, the client decided to implement an effective Model Risk Management Framework on an enlarged scope of internal models, such as the valuation of financial instruments, the measurement of financial risks, stress tests, and ALM models.
Avantage Reply supported the bank in the implementation an action plan defined to address these recommendations through the following stages: