Independent Model Validation

Prescio offers an efficient and experienced approach to independent model validation. Our seasoned team of professional analysts have strong backgrounds in finance, quantitative analysis, statistical analysis, and IT.

Independent model validation enhances the reliability of a model by identifying and addressing model errors. The process of validation (or independent peer review) allows for improvements and better estimates of a model’s strengths and weaknesses among management and user groups.

We have the competency and knowledge base to thoroughly analyze all financial model components including logic, input, output, and process to provide a model validation that is reliable and free from bias.

Independent Model Validation Services:

Prescio maintains a holistic approach to model validation by first developing a complete map of the entire modeling process and the operations environment. The approach then focuses on data inputs, key assumptions, and sound theoretical formulation and documentation.

Our model review teams are comprised of leading experts in the banking and finance industries who work alongside Prescio mathematicians and statisticians. The goal of this approach is to provide sound judgment in the theoretical foundation of the model related to data analysis, customized testing of model fit and output, and regulatory compliance.

Prescio has developed a suite of proprietary financial applications that are used for benchmarking during our model validation process. These benchmarking products cover a wide spectrum of risk model requirements.

As a part of the independent model validation process, Prescio helps institutions improve their balance sheet management capabilities. We have deep domain expertise in both building and validating ALM risk models.

Prescio maintains an in-house operational risk model that merges a Bayesian methodology with the Loss Distribution Approach (LDA). We use this in-house model for comparison when externally validating a given operational risk framework.

The History and Importance of Independent Model Validation

Financial institutions and utility companies must constantly upgrade their business processes in order to remain competitive, adapt to changing market conditions, and meet regulatory requirements. With the Basel I and Basel II accords, the compliance requirements for financial and banking institutions increased substantially.

In the wake of the 2008 financial crisis new rules were established with The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFAST), the Comprehensive Capital Analysis and Review (CCAR) program, and upgrades to the model validation guidance from OCC 2000-16 to OCC 2011-20 (FRB SR 11 – 7). These new laws have significantly changed the regulatory landscape and requirements to remain compliant.

With these changes, institutions must upgrade their quantitative models and risk models. These models are a critical component of many business processes. Once developed, companies are required to have independent and comprehensive validations performed in order to evaluate model risks. These risks include, but are not limited to errors in logic, programming, execution, and use.

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