Debt Security Risk Model Validation (SRM Debt)

Debt Security Risk Model Validation (SRM Debt)

A regional bank collaborated with Prescio to perform DFAST Stress Testing model validation for Debt Security Risk Model. The model forecasts debt securities probability of default given assumed loss given default rate for currently held debt securities, under three supervisory scenarios: Base, Adverse, and Severely Adverse. Transition matrix was used in the model development. Prescio validated the model according to the bank’s model governance policy and FRB Supervisory Letter SR 11-7. Prescio made recommendations for conceptual soundness and model implementation improvement.