ICAAP models : Model inventory and multi-year model validation plan

The client is one of the largest financial institutions in France. It offers its clients a wide range of products and services: savings, investment, treasury, financing, insurance and investment solutions.

THE CHALLENGE

Following an ECB on-site inspection dedicated on the Group’s ICAAP, many findings pointed out the necessary areas of improvement of ICAAP models but also the lack of independent validation of key Pillar 2 models. In addition, the ECB concluded that the bank did not have sufficient quantitative capabilities or resources to properly conduct independent validations of these models. To address these shortcomings and as a first step to an effective Model Risk Management Framework, the client decided to develop an inventory of all ICAAP models in order to score them and define the key priorities in terms model validation for the following years.

APPROACH AND SOLUTION

Avantage Reply supported the bank in the implementation an action plan to address the shortcomings of the ICAAP validation process. This was done through conducting a number of methodological workshops in order to:

• Define what could be considered as an ICAAP model to identify all internal models that needed to be included in the new independent validation scope
• Design a granular ICAAP model inventory
• Build a model scorecard which could be used to score and rank the models considering the key steps of the model lifecycle
• Establish a multi-year independent validation program
• Draft a set model and application inventory procedures to close the ECB’s key findings regarding ICAAP model independent validation

RESULTS AND BENEFITS

At the conclusion of the project, the key benefits and results for the bank were:

• The concept of “ICAAP model” was defined and included in the validation process
• The scope of ICAAP models to be reviewed by the independent validation function was defined, including economic capital models, stress testing models, ALM models and risk models
• A model inventory was established and enriched with a scorecard to rank and tier all models in the inventory
• The model validation process was reinforced with the creation of a multi-year independent validation programme for all ICAAP models