Evaluation of Model Conceptual Soundness

The evaluation will be conducted by senior R2Metrics consultants and includes a hands- on approach to verify all the model inputs and calculations. The rigor and sophistication of evaluation will be commensurate with the bank’s overall use of the model, the complexity and materiality of the model, and the size and complexity of the bank’s operations. The evaluation will review (but not limited to)

  • Detailed analysis of the equations and math behind the model
  • Search for theoretical errors
  • Review of the model controls and available assumptions
  • Examination of model cash flows for each asset category and rate scenario
  • Review of sufficient contractual-based inputs
  • Assessment of loan model’s ability to properly handle optionality
  • Valuation assumptions and methodologies
  • Reasonableness of asset and liability behavioral assumptions
  • Sensitivity analysis of model assumptions
  • Model’s robustness matches the bank’s balance sheet composition

This evaluation is mainly performed on in-house developed models, outsourced models run by bank staff, and outsourced models and analysis provided by a smaller or non-validated A/L providers.

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