We are proud to present the second edition of the model practice survey conducted by Deloitte during the first half of 2010. Due to the success of the 2009 edition, which primarily had European financial institutions in scope, it was decided to broaden the scope to global coverage. This survey includes the response of 89 financial institutions, including banks, insurers, and investment managers. The survey elaborates on the challenges that financial institutions face with models in an environment, in which prevailing financial risk management theory is being questioned.
The survey addresses four dimensions of model practice: model governance; model design and standards for acceptance; reporting and calculation systems; and data. The questions asked are relevant for banking, insurance and investment management regulation.
Besides the four model practice dimensions mentioned above, we interviewed the participants in more detail on a number of hot topics. The specific topics for this year’s survey are model risk, outsourcing, and counterparty credit risk.
We are very grateful to all participating financial institutions, as well as all participating member firms, for their contribution to this research initiative.
For now we hope you will find the global model practice survey 2010 useful.
Model governance is of utmost importance. Unambiguous accountability and responsibility for each risk model mitigate inefficient processes and regulatory issues.
Models provide powerful tools for professionals within the financial services industry for identifying, assessing, monitoring, measuring and mitigating risks, for decision support and scenario analyses, and to determine the value of your assets and liabilities. Both internal as well as external stakeholders rely on information resulting from models. As a result of years of research and using models in practice, model reliability and credibility have increased. This has been manifested in a prominent role for models in supervisory frameworks such as Basel II and Solvency II.
The regulatory frameworks require models to be transparent and of high quality. The output from the models should be such that they can be interpreted unambiguously and applied consistently. Elements like these should be safeguarded by designing and embedding a proper model practice.
Experience shows that there is room for improvement in model practice. This report discusses the current model practice maturity within the various institutions that we interviewed, as well as a number of areas for improvement. The results are also compared, where possible, to the results of the 2009 model practice survey.