Model Risk Management, Climate Stress Testing and Model Validation

Scope of work

• Model governance assessed across the full lifecycle, covering the processes for identifying, measuring, monitoring, mitigating and reporting model risk:

  • Data management, model development, implementation, usage and performance monitoring
  • Validator independence, vendor assessment and validation scope definition
  • Correction of identified deficiencies

• Policy drafted from the identified gaps, producing a model management standard document alongside training and awareness policies and the supporting model risk management tools.

• Qualitative and quantitative validation performed on the models in use, the first covering conceptual soundness, design, scope and output suitability, the second assessing model output numerically against the objective originally assigned to each model.

• RAROC model validation covering theoretical foundations and assumptions, and evaluation of the risk-adjusted return algorithms for accurate integration of risk measures and financial variables and consistency with economic fundamentals.

• Regulatory alignment checked, assessing risk measurement techniques, capital allocation frameworks and overall risk management strategy against current CBUAE guidance, with RAROC documentation reviewed for coverage and adequacy of approach, methodology, inputs and assumptions.

• Transition risk stress testing run on the platform methodology using three NGFS scenarios, deriving the impact of different policy ambitions on energy and transition-relevant sectors, emissions and land use, through a bottom-up analysis of securities issuer by issuer within defined economic sectors.