Validation of Advanced Internal Rating-Based (AIRB) Low-Default Portfolio Models

The client, a large bank based in Luxembourg, needed support to validate three AIRB (Advanced Internal Rating-Based) low default portfolio models. Avantage Reply  assisted the client by validating all three models and by supporting various stakeholders in developing an approach to ensure the compliance with regulatory requirements. Avantage Reply not only completed the validation within a strictly limited time frame, but also provided a valuable third-party view regarding how to further improve the models and the model governance.

CUSTOMER GOALS & CHALLENGES

The client required Avantage Reply to carry out both qualitative and quantitative validation of three AIRB models. They also aimed to establish a comprehensive approach to Model Risk Management across the suite of models used by the Bank.

To effectively support the client, Avantage Reply needed to quickly gain a deep understanding of the client’s organization and its operations to develop recommendations within a short time frame. The client trusted Avantage Reply to deliver insights on industry practices and an assessment of the expert recommendations the client had been presented with so far.

SOLUTION

• Avantage Reply benchmarked the Bank’s model validation approach against the industry standards, regulatory requirements and supervisory expectations.
• Avantage Reply also delivered three independent model validation reports, including recommendations for enhancement.
• Avantage Reply also proposed concrete organizational changes based on their experience and industry best practices to optimize the governance within the client’s risk management function.

CUSTOMER DESCRIPTION

The client is a large financial institution based in Luxembourg.