CFO Focus: Independent model risk management

Balancing internal and external validation resources

Although the National Credit Union Administration has not issued any overarching guidance on model risk management, it has published various comments on model validator independence and the importance of a risk-focused approach. Absent more explicit NCUA direction, many credit unions have adopted other regulators’ supervisory guidance on model risk management, e.g., the Office of the Comptroller of Currency’s 2011-12 bulletin or the Federal Reserve’s SR 11-7 supervisory letter. Regardless of the standard, resource limitations frequently make independent, competent, risk-focused model risk management a challenge for credit unions.

This article is a guide for deciding between staffing a fully independent internal model validation department, outsourcing the entire operation, or a combination of the two.

Striking the appropriate balance is a function of at least four factors:

  1. control and independence,
  2. cost,
  3. financial risk, and
  4. external (regulatory, market, and other) risk considerations.

 

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