This article explores how financial institutions can provide effective risk management for qualitative models. Written by Jacob Kosoff, Ximena Zambrano, and Matthew Grayson.
Adopting a Top-Down Approach to Model Risk Governance to Optimize Digital Tra...Jacob Kosoff
Model risk management programs often began their journey by first creating a definition of a model. Then model risk groups would perform model risk activities on each item that met the definition of a model. These model risk activities include classifying risk, assessing current uses, evaluating ongoing monitoring results, validating conceptual soundness, testing model changes, and so forth. This approach was an important beginning for the field of model risk management as it helped identify existing models, discover fundamental errors in existing models, and prevent inappropriate use of models. However, model risk teams often focused only on processes that already include models and did not identify processes that would be significantly improved by using models. This results in model risk teams overlooking modeling capabilities that a process truly needs. However, model risk teams can go on the offensive and use their model inventory as a source of crucial business intelligence. Model risk teams can start to identify processes that do not include models and could recommend the use of existing models to improve those processes. Furthermore, model risk teams can reduce expenses at a bank by guarding against the development or purchase of models with redundant capabilities. Model risk management teams can ultimately be a champion for the extensibility and efficient use of models at an institution. The article was written by Jacob Kosoff, Aaron Bridgers, and Henry Lee. The article was published by the RMA Journal in September 2020.
Credit Audit's Use of Data Analytics in Examining Consumer Loan PortfoliosJacob Kosoff
Written by Jacob Kosoff and published in September 2013 by the RMA Journal. This article describes banks in 2012 & 2013 were modernizing their Credit Review functions.
Understanding and validating the uses of machine learning modelsJacob Kosoff
WHILE MACHINE LEARNING (ML) CAN OFFER THE BENEFIT OF IMPROVED MODEL RESULTS, A BANK SHOULD CONSIDER WHETHER IT IS APPROPRIATE TO ACCEPT THE ADDITIONAL COMPLEXITY, AS WELL AS THE TESTING AND MONITORING, INVOLVED. THIS ARTICLE DISCUSSES BEST PRACTICES IN PERFORMING VALIDATIONS OF MACHINE LEARNING MODELS.
Written by Shannon Kelly of Zions Bank, Jacob Kosoff of Regions Bank, Agus Sudjianto of Wells Fargo, and Aaron Bridgers of Regions Bank.
Moderating the Churn: Retaining employees in the quantitative banking spaceJacob Kosoff
This article describes strategies on how to attract, develop and retain data scientists and other individuals with strong quantitative and data skills. Regions Model Risk Management and Validation has benefited from under 10% external turnover for the past five years and the article discusses how we at Regions has reached that success. Written by Jacob Kosoff and Irina Pritchett.
Regulatory scrutiny has significantly increased and has prompted banks to develop complex models at the lowest level of granularity to capture the impact of economic cycles. Segmentation is one of the first steps in establishing a quantitative basis for the enterprisewide scenario analysis of stress testing.
CCAR & DFAST: How to incorporate stress testing into banking operations + str...Grant Thornton LLP
Banks are integrating elements of regulatory stress testing into their everyday business processes and strategic planning exercises, and optimizing enterprise risk management in the process. What does enterprise wide stress testing mean for a financial institution? What are the impacts and implications to a financial institution?
This article explores how financial institutions can provide effective risk management for qualitative models. Written by Jacob Kosoff, Ximena Zambrano, and Matthew Grayson.
Adopting a Top-Down Approach to Model Risk Governance to Optimize Digital Tra...Jacob Kosoff
Model risk management programs often began their journey by first creating a definition of a model. Then model risk groups would perform model risk activities on each item that met the definition of a model. These model risk activities include classifying risk, assessing current uses, evaluating ongoing monitoring results, validating conceptual soundness, testing model changes, and so forth. This approach was an important beginning for the field of model risk management as it helped identify existing models, discover fundamental errors in existing models, and prevent inappropriate use of models. However, model risk teams often focused only on processes that already include models and did not identify processes that would be significantly improved by using models. This results in model risk teams overlooking modeling capabilities that a process truly needs. However, model risk teams can go on the offensive and use their model inventory as a source of crucial business intelligence. Model risk teams can start to identify processes that do not include models and could recommend the use of existing models to improve those processes. Furthermore, model risk teams can reduce expenses at a bank by guarding against the development or purchase of models with redundant capabilities. Model risk management teams can ultimately be a champion for the extensibility and efficient use of models at an institution. The article was written by Jacob Kosoff, Aaron Bridgers, and Henry Lee. The article was published by the RMA Journal in September 2020.
Credit Audit's Use of Data Analytics in Examining Consumer Loan PortfoliosJacob Kosoff
Written by Jacob Kosoff and published in September 2013 by the RMA Journal. This article describes banks in 2012 & 2013 were modernizing their Credit Review functions.
Understanding and validating the uses of machine learning modelsJacob Kosoff
WHILE MACHINE LEARNING (ML) CAN OFFER THE BENEFIT OF IMPROVED MODEL RESULTS, A BANK SHOULD CONSIDER WHETHER IT IS APPROPRIATE TO ACCEPT THE ADDITIONAL COMPLEXITY, AS WELL AS THE TESTING AND MONITORING, INVOLVED. THIS ARTICLE DISCUSSES BEST PRACTICES IN PERFORMING VALIDATIONS OF MACHINE LEARNING MODELS.
Written by Shannon Kelly of Zions Bank, Jacob Kosoff of Regions Bank, Agus Sudjianto of Wells Fargo, and Aaron Bridgers of Regions Bank.
Moderating the Churn: Retaining employees in the quantitative banking spaceJacob Kosoff
This article describes strategies on how to attract, develop and retain data scientists and other individuals with strong quantitative and data skills. Regions Model Risk Management and Validation has benefited from under 10% external turnover for the past five years and the article discusses how we at Regions has reached that success. Written by Jacob Kosoff and Irina Pritchett.
Regulatory scrutiny has significantly increased and has prompted banks to develop complex models at the lowest level of granularity to capture the impact of economic cycles. Segmentation is one of the first steps in establishing a quantitative basis for the enterprisewide scenario analysis of stress testing.
CCAR & DFAST: How to incorporate stress testing into banking operations + str...Grant Thornton LLP
Banks are integrating elements of regulatory stress testing into their everyday business processes and strategic planning exercises, and optimizing enterprise risk management in the process. What does enterprise wide stress testing mean for a financial institution? What are the impacts and implications to a financial institution?
Emerging Differentiators of a Successful Wealtlh Management PlatformCognizant
Changes in the wealth management industry are driving the need for a flexible, scalable platform that enables wealth managers to differentiate their services and profitably serve the mass affluent and mass markets.
Compliance implications of crossing the $10 billion asset thresholdGrant Thornton LLP
Since the passage of the Dodd-Frank Act, small regional banks have been forced to rethink their growth strategies as they inch closer to the $10 billion assets threshold. Here’s guidance on navigating the new regulatory field.
Like the rest of the financial services industry, insurers are subject to increasingly complex and prescriptive regulations and standards. In the year ahead, insurers will need to focus on the new U.S.Department of Labor fiduciary standard, which is likely to have a significant effect on how insurance products are sold. Moreover, global developments, especially those related to the developing International Capital Standard, will require insurers to closely monitor – and ideally contribute to – official discussions about how globally active insurers should manage capital
Taking the road to advanced approaches and heightened standards in risk manag...Grant Thornton LLP
Develop and execute a roadmap to meet rising regulatory and stakeholder expectations. Banks of all sizes are required to build sophisticated analytical risk management capabilities in compliance with Dodd-Frank and other legislation making a priority of optimizing the deployment of capital and infusing objectivity into its allocation.
Keys to extract value from the data analytics life cycleGrant Thornton LLP
Regulatory mandates driving transparency and financial objectives requiring accurate understanding of customer needs have heightened the importance of data analytics to unprecedented levels making it a critical element of doing business.
Expert Judgement Credit Rating for SME & Commercial CustomersMike Coates
A high-level presentation from GBRW Consulting on some of the key issues relevant to developing and then implementing a sound credit scoring and rating system for Small- to Medium-sized Enterprises (SMEs) and commercial banking customers. It focuses on the implementation of an 'expert judgement' approach to credit rating as an alternative to statistical approaches where data is inadequate. It is particularly relevant for emerging market or start-up banks where historical financial statement analysis may be easily accessible or reliable.
In depth: New financial instruments impairment modelPwC
On June 16, 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) (the “ASU”). The ASU introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets.
Turn the STRESS in Stress Testing (Bank Loan Portfolios) into an Empowering E...Gateway Asset Management
Sponsored by Gateway Asset Management, this webinar document covers:
> Stress vs. Empowerment
> Primary Regulatory and Accounting Catalysts
> CECL- Current Expected Credit Loss Model/ALLL
> Stress Testing – Loan Portfolios
> Why Prepare for CECL and Stress Testing At The Same Time?
> Life-of-Loan "Base Case" & Stress Testing - Foundation - Building Blocks
> Models – Different sources and levels of sophistication
> Use of Models - Regulatory Guidance
> Why Start Preparing for CECL and Stress Testing Now?
Key learnings of recent AQR & CCAR exercises suggest that some significant moves are required to fulfil market & regulators expectations. In this context, CH&Cie is pleased to share with you the latest developments in implementing stress testing as well as best practices
Emerging Differentiators of a Successful Wealtlh Management PlatformCognizant
Changes in the wealth management industry are driving the need for a flexible, scalable platform that enables wealth managers to differentiate their services and profitably serve the mass affluent and mass markets.
Compliance implications of crossing the $10 billion asset thresholdGrant Thornton LLP
Since the passage of the Dodd-Frank Act, small regional banks have been forced to rethink their growth strategies as they inch closer to the $10 billion assets threshold. Here’s guidance on navigating the new regulatory field.
Like the rest of the financial services industry, insurers are subject to increasingly complex and prescriptive regulations and standards. In the year ahead, insurers will need to focus on the new U.S.Department of Labor fiduciary standard, which is likely to have a significant effect on how insurance products are sold. Moreover, global developments, especially those related to the developing International Capital Standard, will require insurers to closely monitor – and ideally contribute to – official discussions about how globally active insurers should manage capital
Taking the road to advanced approaches and heightened standards in risk manag...Grant Thornton LLP
Develop and execute a roadmap to meet rising regulatory and stakeholder expectations. Banks of all sizes are required to build sophisticated analytical risk management capabilities in compliance with Dodd-Frank and other legislation making a priority of optimizing the deployment of capital and infusing objectivity into its allocation.
Keys to extract value from the data analytics life cycleGrant Thornton LLP
Regulatory mandates driving transparency and financial objectives requiring accurate understanding of customer needs have heightened the importance of data analytics to unprecedented levels making it a critical element of doing business.
Expert Judgement Credit Rating for SME & Commercial CustomersMike Coates
A high-level presentation from GBRW Consulting on some of the key issues relevant to developing and then implementing a sound credit scoring and rating system for Small- to Medium-sized Enterprises (SMEs) and commercial banking customers. It focuses on the implementation of an 'expert judgement' approach to credit rating as an alternative to statistical approaches where data is inadequate. It is particularly relevant for emerging market or start-up banks where historical financial statement analysis may be easily accessible or reliable.
In depth: New financial instruments impairment modelPwC
On June 16, 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) (the “ASU”). The ASU introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets.
Turn the STRESS in Stress Testing (Bank Loan Portfolios) into an Empowering E...Gateway Asset Management
Sponsored by Gateway Asset Management, this webinar document covers:
> Stress vs. Empowerment
> Primary Regulatory and Accounting Catalysts
> CECL- Current Expected Credit Loss Model/ALLL
> Stress Testing – Loan Portfolios
> Why Prepare for CECL and Stress Testing At The Same Time?
> Life-of-Loan "Base Case" & Stress Testing - Foundation - Building Blocks
> Models – Different sources and levels of sophistication
> Use of Models - Regulatory Guidance
> Why Start Preparing for CECL and Stress Testing Now?
Key learnings of recent AQR & CCAR exercises suggest that some significant moves are required to fulfil market & regulators expectations. In this context, CH&Cie is pleased to share with you the latest developments in implementing stress testing as well as best practices
Undertaking a valuation of a private company can be a confusing exercise for that company's founders, directors & shareholders.
In this short whitepaper experienced investment banker Nicholas Assef highlights a number of the areas of business operation that need to be considered in the valuation exercise. In each valuation engagement the nature of "heads" for consideration will be different.
Importantly the reader should take 2 standout points from this whitepaper. Growth & certainty of cashflows. A company's valuation is a reflection of many things - but in particular the probability and certainty that future growth and performance will be delivered.
As the methodologies for IFRS 9 Implementation are still evolving, many banks are in the process of developing a roadmap towards implementation and are still evaluating methodologies that are likely to conform to the principles of proportionality and materiality. To this end, Banks being advised are to develop a Target Operating Model (TOM) design, which seeks to identify and document the work program required to meet IFRS 9 requirements on Impairment modelling and ECL estimation.
The implementation of the MAR in 2010 will
provide a valuable opportunity for insurers
to assess the effectiveness of their internal
controls and the accuracy of their financial
reporting. Insurers must promptly develop a
strategy for compliance with the MAR if they
have not done so already. A set of corporate
norms for complying with the new MAR
has yet to develop, but actuaries have the
knowledge and skills to assist in many aspects
of the process and can help determine the set
of best practices moving forward.
RISK-ACADEMY’s guide on risk appetite in non-financial companies. Free downloadAlexei Sidorenko, CRMP
Risk appetite refers to an individual or organization’s willingness to take on risks in pursuit of potential returns. It is an important consideration for businesses, as it can determine the types of investments and strategic decisions they make. A high risk appetite may lead to a focus on high-growth, speculative investments, while a low risk appetite may result in a preference for more conservative, steady returns. It is important for businesses to carefully assess and manage their risk appetite in order to make informed decisions and achieve their financial goals.
But before beginning the conversation about risk appetite, it is important to remember that most non financial organizations have already documented their appetites for different common decisions or business activities. Segregation of duties, financing and deal limits, vendor selection criteria, credit limits, treasury limits on banks, investment criteria, zero tolerance to fraud or safety risks – are all examples of how organizations set risk appetite.
What is risk appetite:
10% of the time risk appetite is imposed by laws and regulations, not set – Often risk appetite is imposed by government, regulators, markets, not set by management. Examples include zero-tolerances or limits on safety, bribery and corruption, AML, pollution, sanctions, privacy.
10% of the time risk appetite is the gentlemen’s agreement between Board and management – Boards have an important oversight role and help them set the direction and boundaries for management decision making. Those management decision making boundaries is risk appetite. Examples include deal approvals only by Board above a certain limit, limits on holding percentage of cash in certain pre-approved banks, market risk limits, credit risk limits, insurance thresholds, rules on credit limits for certain types of customers, limits on investments in different countries, etc.
80% of the time risk appetite is the risk reward trade-off for a specific decision – The key is making uncertainty around decisions presented to the Board transparent to allow decision makers choose the alternative which offers the most appropriate risk reward balance according to their individual appetites.
Download the full guide to read about documenting risk appetite, reviewing risk appetite, case studies and examples and addition video resources: Guide to risk appetite 2023
In our second post ‘building blocks of Impairment Modeling’, we had highlighted that IFRS 9 uses a ‘three stage model’ for measurement of ECL, and one of the major challenges of implementing this model was tracking and determining whether there has been a significant increase in risk of a credit exposure since origination. This blog post delves into the intricacies related to the three stage model, and some nuances that need to be considered for a bank looking to implement IFRS 9.
Analyzing Financial Projections as Part of the ESOP Fiduciary Process | Appra...Mercer Capital
In recent years there has been increasing concern among ESOP sponsors and professional advisors (trustees, TPAs, business appraisers, legal counsel) regarding the scrutiny of the DOL, the Employee Benefits Security Administration (“EBSA”), and the Internal Revenue Service (“IRS”). These entities (and agencies thereof) are tasked with ensuring that ESOPs comply with the Employee Retirement Income Security Act (“ERISA”) as well as with various provisions of the federal income tax code concerning qualified retirement plans (including ESOPs). Citing concerns for poor quality and inconsistency in business appraisals, the DOL has sought in recent years to expand the meaning of “fiduciary” under ERISA to include business appraisers. In the most recent forums of exchange and deriving from various court actions, there are numerous areas of concern that DOL/EBSA appear to have regarding ESOP valuations.
This paper focuses on the use of financial projections in ESOP valuations. The use (or misuse) of financial projections is often the most direct cause of over- or under-valuation in ESOPs.
In March 2014 the Financial Accounting Standards Board (FASB or Board) issued an exposure draft: Proposed Statement of Financial Accounting Concepts: Conceptual Framework for Financial Reporting, Chapter 8: Notes to Financial Statements. The exposure draft proposes a framework that the FASB will use to identify information that is most important to financial statement users of for-profit and not-for-profit entities’ financial statements, and to reduce unnecessary disclosures within those financial statements. Comments on the exposure draft are due July 14, 2014.
The disclosure framework project began in 2009 as an effort to create financial disclosures that are more effective, coordinated and less redundant. In 2012 the FASB issued an invitation to comment that outlined the objectives of the project’s two phases: the Board’s decision process and the entity’s decision process. The March 2014 exposure draft addresses the Board’s decision process phase of the project.
A Guide for Credit Providers Moving to Participate in CCR by David GraftonDavid Grafton
Here's my latest white paper and associated spreadsheet, intended as a practical guide for all credit providers moving to participate in comprehensive credit reporting (CCR).
The white paper sets out all of the considerations and actions that a CP’s stakeholders need to take at each step of the CCR journey.
The roadmap spreadsheet (available at www.davidgrafton.com.au) is a timeline showing month by month what needs to happen, by which part of the organisation.
The white paper is available as a hard copy upon request.
Accenture 2015 Global Structural Reform Study: Unlocking the Potential of Glo...Accenture Insurance
As they reshape the financial services industry in light of the 2007-2008 financial crisis, global regulators have introduced a series of structural reform regulations to help build resilience. Global Structural Reform (GSR) is creating a new financial services ecosystem for institutions.
Accenture’s 2015 Global Structural Reform Study finds senior management working to thrive in what amounts to an all-new financial services landscape. They are investing effort and funds in their response to GSR, but their focus is on meeting regulatory demands. While that represents a good starting point, our study finds institutions might be missing out when it comes to meeting the strategic implications of reform and using reform as an opportunity to reposition the organization for sustainable growth
As Europe's leading economic powerhouse and the fourth-largest hashtag#economy globally, Germany stands at the forefront of innovation and industrial might. Renowned for its precision engineering and high-tech sectors, Germany's economic structure is heavily supported by a robust service industry, accounting for approximately 68% of its GDP. This economic clout and strategic geopolitical stance position Germany as a focal point in the global cyber threat landscape.
In the face of escalating global tensions, particularly those emanating from geopolitical disputes with nations like hashtag#Russia and hashtag#China, hashtag#Germany has witnessed a significant uptick in targeted cyber operations. Our analysis indicates a marked increase in hashtag#cyberattack sophistication aimed at critical infrastructure and key industrial sectors. These attacks range from ransomware campaigns to hashtag#AdvancedPersistentThreats (hashtag#APTs), threatening national security and business integrity.
🔑 Key findings include:
🔍 Increased frequency and complexity of cyber threats.
🔍 Escalation of state-sponsored and criminally motivated cyber operations.
🔍 Active dark web exchanges of malicious tools and tactics.
Our comprehensive report delves into these challenges, using a blend of open-source and proprietary data collection techniques. By monitoring activity on critical networks and analyzing attack patterns, our team provides a detailed overview of the threats facing German entities.
This report aims to equip stakeholders across public and private sectors with the knowledge to enhance their defensive strategies, reduce exposure to cyber risks, and reinforce Germany's resilience against cyber threats.
Techniques to optimize the pagerank algorithm usually fall in two categories. One is to try reducing the work per iteration, and the other is to try reducing the number of iterations. These goals are often at odds with one another. Skipping computation on vertices which have already converged has the potential to save iteration time. Skipping in-identical vertices, with the same in-links, helps reduce duplicate computations and thus could help reduce iteration time. Road networks often have chains which can be short-circuited before pagerank computation to improve performance. Final ranks of chain nodes can be easily calculated. This could reduce both the iteration time, and the number of iterations. If a graph has no dangling nodes, pagerank of each strongly connected component can be computed in topological order. This could help reduce the iteration time, no. of iterations, and also enable multi-iteration concurrency in pagerank computation. The combination of all of the above methods is the STICD algorithm. [sticd] For dynamic graphs, unchanged components whose ranks are unaffected can be skipped altogether.
Chatty Kathy - UNC Bootcamp Final Project Presentation - Final Version - 5.23...John Andrews
SlideShare Description for "Chatty Kathy - UNC Bootcamp Final Project Presentation"
Title: Chatty Kathy: Enhancing Physical Activity Among Older Adults
Description:
Discover how Chatty Kathy, an innovative project developed at the UNC Bootcamp, aims to tackle the challenge of low physical activity among older adults. Our AI-driven solution uses peer interaction to boost and sustain exercise levels, significantly improving health outcomes. This presentation covers our problem statement, the rationale behind Chatty Kathy, synthetic data and persona creation, model performance metrics, a visual demonstration of the project, and potential future developments. Join us for an insightful Q&A session to explore the potential of this groundbreaking project.
Project Team: Jay Requarth, Jana Avery, John Andrews, Dr. Dick Davis II, Nee Buntoum, Nam Yeongjin & Mat Nicholas
Explore our comprehensive data analysis project presentation on predicting product ad campaign performance. Learn how data-driven insights can optimize your marketing strategies and enhance campaign effectiveness. Perfect for professionals and students looking to understand the power of data analysis in advertising. for more details visit: https://bostoninstituteofanalytics.org/data-science-and-artificial-intelligence/
Predicting Product Ad Campaign Performance: A Data Analysis Project Presentation
Impact of Recent Supervisory Guidance on Capital Planning
1. The RMA Journal February 2017
44
ENTERPRISERISK
<$50 BILLION $50-$250 BILLION >$250 BILLION
The Impact of Recent Supervisory
Guidance on Capital Planning
2. February 2017 The RMA Journal 45
S
hutterstock
.
com
certain areas of capital planning may
require enhanced rigor—even for less
complex firms.
To help banks digest this new guid-
ance, this article focuses on the day-to-
day impacts for the large and noncomplex
firms that take part in the Federal Re-
serve’s Comprehensive Capital Analysis
and Review (CCAR), while also providing
useful takeaways for medium-size and
smaller firms.
Key features of both the heightened
expectations and the reduced or tailored
expectations are detailed below, including
governance, risk management, internal
controls, capital policy, incorporating
stressful conditions, and estimating im-
pacts on capital positions.
Potentially Tailored Expectations
Large and noncomplex (LNC) firms oper-
ating under SR 15-19 have an opportunity
to assess the impact of the guidance and
to potentially identify tailored expecta-
tions. SR 15-19 does not appear to reduce
expectations drastically for less complex
large firms, and meaningful pullbacks
in capital planning activities would not
seem the intent of the supervisory guid-
ance. However, there are certain areas,
outlined below, where expectations seem
to have been tailored between the sys-
temically important financial institutions
(SIFIs) and the LNC firms.
1. Scenario Design
LNC firms may currently produce in-
ternal baseline and stress scenarios, which
require significant resources, models, and
production time. SR 15-19 provides relief
in this area by allowing a firm to 1) adopt
the Federal Reserve’s baseline scenario as
its own, and 2) adjust the Fed’s severely
adverse scenario to reflect the firm’s own
activities, outlooks, and idiosyncratic
risks, instead of developing an internal
forecast.
In practical terms, this change presents
both a risk and an opportunity. The risk
lies in the fact that the scenarios may not
be published until a few weeks before the
CCAR submission due date, which has
been the pattern in past CCAR cycles. If
this trend continues, firms will not know
what the scenarios will contain until late
in the production cycle. To complicate
matters further, the scenarios may not
be consistent with the firm’s specific risks
and therefore could require significant
tweaking. Waiting for unknown sce-
narios may crunch an already tight pro-
duction timeline and disrupt the firm’s
governance process.
Despite the opportunities for reduced
costs, curtailing of redundancies, and a
more simplified process, some firms may
decide that the risks outweigh the ben-
efits, considering that the firm’s capital
plan is determined by these scenarios.
2. Use of Qualitative Approaches
versus Quantitative Approaches
Today’s LNC firms might rely heavily
on quantitative approaches for generating
projections. However, these firms may
consider using qualitative approaches,
especially if they can establish that these
simpler approaches produce realistic and
transparent output and that they are sup-
ported by well-documented rationale
based on expert judgment. Importantly,
these qualitative approaches must be well
supported and, although they may reduce
overhead in some ways, they could re-
quire new costs to establish and support
their ongoing use.
Similarly, a firm may use simple as-
sumptions to generate estimates for im-
material portfolios or businesses, which
would imply that the use of simple ratios
or cause-and-effect relationships may be
possible in certain instances. SR letter
BY JACOB KOSOFF
AND RACHEL BRYANT
In the context of capital planning, the
Federal Reserve separates banks into three
tiers based on asset size: 1) banks with
less than $50 billion in assets, 2) banks
with between $50 and $250 billion, and
3) banks with more than $250 billion.
Over the past 12 months, the Fed began
tailoring capital planning expectations for
banks in the second tier, establishing sig-
nificant differences for this group versus
the larger, more complex institutions.
This bifurcation began on December
18, 2015, when the Federal Reserve is-
sued separate supervisory letters with
guidance on capital planning expectations
for large, noncomplex firms with assets of
between $50 and $250 billion (SR 15-191
)
and large, complex firms with more than
$250 billion in assets (SR 15-182
).
Today, this shift continues as the Fed
publicly discusses3
and clarifies4
these
newly tailored expectations. Meanwhile,
in light of additional details provided in
the new SR letters and in public com-
ments made by Federal Reserve officials,
3. The RMA Journal February 2017
46
allows for a less formal risk identification
process as well as less frequent reviews
of material risks.
While this may represent a relaxation of
logistical requirements, the main require-
ment is the same: “A firm should be able
to demonstrate how material risks are ac-
counted for in its capital planning process.
For risks not well captured by scenario
analysis, the firm should clearly articulate
how the risks are otherwise captured and
addressed in the capital planning process
and factored into decisions about capital
needs and distributions.... The risk identi-
fication process at all firms subject to this
guidance should be dynamic, inclusive,
and comprehensive, and drive the firm’s
capital adequacy analysis.”
Thus, the identification of risks, de-
termination of materiality, and capture
of material risks within the scenarios and
results continue to be critical pillars of
capital planning.
6. Use of Payout Ratios in Distribution
Decision Making
Interestingly, SR 15-19 exempts non-
complex institutions from using payout
ratios when deciding how much capital
to distribute through dividends, share re-
purchases, or other means. Meanwhile,
SR 15-18 expects SIFIs to use quantitative
payout ratios in their decision-making
framework. This presents a conundrum
that may prompt SR 15-19 firms to hold
themselves to the higher standard.
While SR 15-19 may allow firms with
15-19 states, “A firm can apply simple
assumptions to generate losses or PPNR
for its non-material portfolios or business
lines…. A LISCC Firm and a Large and
Complex Firm is generally expected to
use quantitative approaches in estimat-
ing losses and PPNR, whereas a Large
and Noncomplex Firm may use either
quantitative or qualitative approaches.”
Overall, while quantitative approaches
remain useful and important for material
portfolios, the guidance provides latitude
for firms when it comes to deciding where
to invest modeling time and resources.
3. Independent Review of Qualitative
Approaches
Guidance allows for the review of
qualitative and quantitative approaches
to differ based on the complexity of the
approach, the impact of the approach’s
output, and the materiality of the port-
folio or business line for which the quali-
tative approach is used. This allows an
opportunity for quantitative approaches
to continue to be independently reviewed
by a model risk management and vali-
dation team, while the independent re-
view of qualitative approaches may be
performed by other areas of the bank.
4. Use of Benchmark Models
Firms should give careful consider-
ation to the benefits of developing and
deploying benchmark or challenger
models, since the guidance states that
noncomplex firms are not expected to
use benchmark models in their capital
planning processes. However, SR 15-19
is not intended to replace SR 11-7,5
which
mentions benchmarking 11 times. There-
fore, firms should continue to assess the
need for benchmark models in each situ-
ation, as well as assess other methods for
achieving the necessary benchmarking.
5. Formality of the Risk Identification
Process
SIFIs are expected to have a more for-
mal risk identification process, to work
toward greater risk granularity, and to
include quarterly evaluations of material
risks. However, these heightened expec-
tations are not present in SR 15-19, which
assets of less than $250 billion to exclude
payout ratios from their decision-making
framework, doing so may not be advis-
able. Given that distributions funda-
mentally affect the firm’s overall capital
levels, exclusion of payout ratios from the
capital decision-making framework may
prove a difficult or inappropriate choice
for some firms, particularly those seeking
to make material distributions.
7. Full Validation Before Model Use
SR 15-19 states that firms should inde-
pendently validate or review models used
in internal capital planning consistent
with SR 11-7. After devoting multiple
paragraphs to the expectations of these
validations and reviews by a model vali-
dation group, SR 15-19 then recognizes
that not all models can be fully validated
prior to use. This is where the difference
between the sets of banks emerges.
The guidance “expects” SIFIs to
complete full validations prior to use,
while the guidance cautiously allows
for instances when the LNC firms are
expected only to “make efforts to con-
duct a conceptual soundness review”
of material models prior to their use in
capital planning. Therefore, a reading
of the guidance suggests that both sets
of firms should attempt to perform an
independent assessment of the models
prior to use. The SIFIs are expected to
have these completed prior to use, while
LNC firms may have more flexibility.
For example, an LNC firm may simply
While sensitivity analysis has become well established
at the model and portfolio levels, sensitivity analysis
should also be performed at higher aggregated
levels of the capital plan, including assessments
“across the entire firm’s projections under stress.”
4. February 2017 The RMA Journal 47
have model validations in process prior to
use or may only be able to complete the
conceptual soundness review before use
and other components of the validation
follow. Also, SR 15-19 refers to “mate-
rial” models, whereas SR 15-18 refers to
“all” models requiring validation before
use. This gives firms the opportunity to
prioritize validation work and focus on
having, for example, high- and medium-
risk model validations completed prior
to use, while low-risk models may be in
process while the model is in use. This
may require firms to update their corpo-
rate model risk policy to allow for this
situation.
The guidance does refer to this prac-
tice—using a model prior to valida-
tion—as a “model risk management
shortcoming” and recommends using
the model output with “caution” in those
situations. In short, while a firm may, in
certain situations, use a model prior to
the completion of a validation, this ap-
proach is not encouraged and should be
well controlled.
As firms reevaluate the categorization
of their capital planning models, any cat-
egorization of a model as “not material”
will require evidence. Therefore, the time
spent on appropriately understanding
the uncertainty and importance of each
model may increase to ensure appropriate
classification of each model.
Furthermore, leaders of model valida-
tion departments may have to spend a
larger share of their time ensuring that
the criterion to determine materiality is
applied consistently across all validation
teams. To achieve this consistency, firms
may need more rotation of validation
managers and analysts between valida-
tion teams, additional staff training on
appropriately classifying models, and
enhanced classification procedures. For
example, if one validation team considers
materiality relative to the firm’s systemic
risk while another considers materiality
with respect to absolute size, the result
may be inconsistent model classification.
Thus, firms may use SR 15-19 to revisit
their model classification procedures and
outcomes.
8. Other Areas of Potentially Tailored
Expectations
SR 15-19 addresses numerous areas
in which the expectations applied to
large, noncomplex firms may be differ-
ent or less onerous than those applied
to SIFIs, including additional areas not
specifically discussed above. Overall, SR
15-19 reiterates the importance of capital
planning, while enumerating areas where
the different complexities between these
two groups may result in potentially tai-
lored expectations for firms with less than
$250 billion in assets.
TABLE : OTHER AREAS OF POTENTIALLY TAILORED
EXPECTATIONS
Internal audit depth
and breadth
Senior Management
Engagement
Approaches To Operational
Loss Projections
Granularity Of Projections
Use Of External Data
Independent Review
Of Model Overlays
TAKEAWAYS FOR BANKS WITH LESS THAN
$50 BILLION IN ASSETS
While SR 15-19 does not apply to banks with less than $50 billion in assets,
smaller banks may take away a few key points from the new guidance.
First, SR 15-19 reiterates and stresses the importance of stress-testing
fundamentals, including accuracy of reports, reliability of processes,
maintenance of internal controls, effectiveness of internal audit, and
accuracy of reports. These fundamentals are important for all banking
organizations, even those that do not have to comply with SR 15-19.
A smaller institution may benefit from taking a holistic read of the guidance,
since it seems to stress the importance of these and other fundamentals
rather than focusing on complex processes or dictating specific methods
for stress testing.
Meanwhile, SR 15-19 reduces expectations of complexity and, in certain
cases, discusses the risks of conducting an overly complex process.
Embracing the spirit of the letter, a smaller institution might evaluate the
complexity of its processes and note areas where excessive complexity is
hampering essential activities.
Potentially Heightened Expectations
While SR 15-19 tailored expectations in
certain areas, other areas received ad-
ditional attention and detail that firms
may perceive as heightened expectations.
None of these areas is new to capital plan-
ning or regulatory guidance; rather, SR
15-19 provides new details that firms
should fully understand and incorporate
into their processes.
1. Ongoing Capital Planning
SR 15-19 discusses the importance of
capital planning becoming a year-round,
ongoing process that is integrated with
the firm’s regular business activities.
While these expectations may have
been in place before SR 15-19, this
guidance addresses capital planning as
a year-round, ongoing process in a more
explicit manner. Regulators may expect
firms to make a discernable shift toward
5. The RMA Journal February 2017
48
Moreover, SR 15-19 makes clear that
the firm’s standards for managing changes
to the capital planning process should
be codified in internal policy, which is
an expectation that builds on previous
supervisory guidance.
4. Internal Controls
Recent guidance reiterates the impor-
tance of internal controls and describes
various expectations for maintaining
strong internal controls throughout the
capital planning process. After many
years of execution, firms may need to
refresh their internal controls across all
three lines of defense to ensure complete
coverage.
5. Board Reporting
While robust reporting is a long-stand-
ing expectation of a sound capital plan-
ning process, SR 15-19 took additional
steps in detailing the type and depth of
materials to be presented to the board
of directors. Given the specificity in this
regulatory guidance, firms should revisit
their board reporting to ensure compli-
ance with SR 15-19 standards.
Conclusion
Ultimately, SR 15-19 contains many ex-
amples of both tailored and heightened
expectations. Accordingly, firms might
benefit from conducting a gap analysis
integrating capital stress testing into
business-as-usual processes.
2. Firm-Wide Sensitivity Analysis
While sensitivity analysis has become
well established at the model and portfo-
lio levels, sensitivity analysis should also
be performed at higher aggregated levels
of the capital plan, including assessments
“across the entire firm’s projections under
stress.”
Given the importance of sensitiv-
ity analysis and the expectation that
it should be presented to the board of
directors, firm-wide sensitivity analysis
becomes even more important. While
this expectation may create an additional
obligation within capital planning, the
aggregated sensitivity analysis is likely
more digestible and useful for the board
of directors as it reviews and approves
the firm’s capital plan.
3. Change Management
As capital planning processes have ma-
tured across the industry, change manage-
ment has become more critical, simply
because changes can disrupt the estab-
lished process in unexpected ways. Thus,
SR 15-19 expects senior management to
“make certain the firm is identifying,
documenting, reviewing, and tracking all
material changes to the capital planning
process and its components.”
relative to the new guidance to determine
where they are exceeding expectations
and to identify areas where additional
work may be needed.
SR 15-19 is unique: It is the only super-
visory guidance to explicitly differentiate
between SIFIs and firms that are large but
less complex, and it is a welcome addi-
tion to the body of regulatory guidance
because it helps clarify expectations for
banks of both sizes. With this clarified
guidance, the industry can continue to
refine capital planning processes to en-
sure they are sustainable, executable, and
integrated into business practices.
Jacob Kosoff is head of model risk management
and validation and Rachel Bryant is head of capital
planning and stress testing at Regions Bank. They
can be reached at Jacob.kosoff@regions.com. and
Rachel.e.bryant@regions.com.
Notes
1. See Federal Reserve Supervisory Letter 15-19,
“Federal Reserve Supervisory Assessment of
Capital Planning and Positions for Large and
Noncomplex Firms,” December 18, 2015.
2. See Federal Reserve Supervisory Letter 15-18,
“Federal Reserve Supervisory Assessment of
Capital Planning and Positions for LISCC Firms and
Large and Complex Firms,” December 18, 2015.
3. Available at http://www.bloomberg.com/news/
videos/2016-06-02/fed-s-tarullo-on-bank-regula-
tions-fed-policy-economy.
4. Available at http://som.yale.edu/event/2016/09/
daniel-k-tarullo-member-of-the-board-of-governors-
federal-reserve-system.
5. See Federal Reserve Supervisory Letter 11-7,
“Supervisory Guidance on Model Risk Manage-
ment,” April 4, 2011.
The opinions expressed in this article are state-
ments of the authors, are intended only for
informational purposes, and are not opinions of
any financial institution. Any representation to the
contrary is expressly disclaimed.
SR 15-19 IS UNIQUE: IT IS THE ONLY
SUPERVISORY GUIDANCE TO EXPLICITLY
DIFFERENTIATE BETWEEN SIFIS AND FIRMS
THAT ARE LARGE BUT LESS COMPLEX.