Model Risk Management: The Canadian Edition Presentation

TorontoOur CEO, Andy Spero, recently presented at GFMI’s 2016 Model Risk Management: The Canadian Edition. The conference was held in Toronto, Canada, on March 7th and 8th.

Andy was on a panel that discussed “CCAR and DFAST stress testing: What can be adopted by Canadian institutions?” He commented that whether required or not, rigorous scenario analysis and stress testing has benefits far beyond just estimating losses across different environments. Such exercises identify weaknesses in both data and analysis. Firms that truly understand how they can lose money are able to manage their portfolios and businesses across (almost) all conditions. Firms that have data or other gaps probably make implicit (and ignored) compromises in day-to-day management activities, too. The notion is simple: if you can’t estimate your losses across different economic conditions, how can you manage your portfolio or business?

Andy presented, “Methods to Strengthen the 1st Line of Defence,” which is downloadable by clicking the title. In the presentation, he provides a conceptual framework for modeling as a production problem in a quality management framework. For both exogenous and endogenous reasons, much of financial modeling is still more research than development and that leads to uncertain quality, and, therefore, a chance or propensity of failure. Inspection (or validation) and failure-related costs are extremely high, so he argues for a zero-defect or total quality management approach and other methods to provide real-time feedback to developers.

If you have any questions about the presentation, please use our contact form or call us at 1-844-SPEROCO.