Three Reasons Model Management Should Be in the Spotlight
By Larry Roadcap, FI Consulting
Following the last several months’ sprint to finish up the last round of CCAR, Dodd-Frank and NCUA regulatory stress tests, bank executives might be tempted to take a breather before the next round of scrambling gets underway. The chance to rest would certainly be well earned. At GARP’s National Convention in New York last month, several of the thought leaders who spoke confirmed the industry-wide focus on model management – no surprise to bleary-eyed bankers and risk managers.
The heightened scrutiny for these models and methodologies now extends beyond the regulators, who have expressed concerns about model risk for years, to the financial institution leaders whose responsibilities now include signing off on governance frameworks, policies, and procedures. Stress testing has brought to light the tremendous diversity and number of analytic models in use across financial institutions large and small. Most, if not all, of our banking clients have developed management policies and begun to implement formal processes across the development, validation and modeling lifecycle for their firms’ models. Many have formed independent validation units or engaged firms like FI Consulting for model validation services.
So it is no surprise that recent conversations with clients make clear that questions concerning model management are top of mind for bank executives these days. How can bank executives confirm the implementation of policies and processes consistently across an organization that may span a variety of business lines and regions? How do they master not only their models, but the organization and deployment of those models?
In a new normal of heightened regulation and review, model management is more essential now than ever for three reasons.
- Risk Management: The inability to manage is the inability to accomplish. In the most recent 2014 stress tests, regulators failed some institutions not because of inadequate capitalization, but because of shortcomings stemming from cumbersome, time-consuming manual orchestration of tests and models.
- Compliance: Across the banking industry, a common Achilles’ heel is the inability to demonstrate adequate controls and documentation over model management at a level of granularity needed to address regulators’ and auditors’ queries promptly and convincingly. Moreover, without the needed controls, the departure of key people can spell trouble when auditors and regulators arrive.
- Performance: Without the tools to streamline and organize those queries, addressing them can consume a tremendous amount of time, energy and cost as bank analysts pour through documents, spreadsheets, and email trails instead of building and verifying business-critical models. And hiring more people can be difficult and too costly when there is ever more pressure on bank profits.
To help banks address these needs, FI Consulting has been hard at work developing OTIS Model Manager – a lightweight, high-impact tool of the kind our firm specializes in creating. Drawing on our extensive experience with financial modeling, model validation, and process management, OTIS provides an easy-to-implement, low-maintenance system with a host of essential features that help cut through the complexity of model risk management. Key functionality includes:
- Purpose-built inventory management
- Automated workflows with full audit trails
- Scheduling and alerts
- Document management
OTIS can help your organization save time, improve efficiency, and instill confidence in your team’s ability to manage risks to the models on which your business depends.
Larry Roadcap leads FI Consulting’s Commercial Financial Institutions practice which serves the needs of our for-profit clients outside the government sector. He is a financial systems and risk management executive with 20 years of experience working with banks, corporate finance teams, and capital market participants across the US, Asia, Australia, and the UK. Larry is responsible for ensuring clients get the most from FI Consulting’s services across our core expertise in data management, risk analytics, financial modeling, and technology. Larry is a Virginia native and holds degrees from Georgetown University, Columbia Business School, and the University of California – Berkeley.