Leka Research Institute

  • For first class advisory and risk consulting services, you can trust Leka Research!
  • Working Hours - Mon - Fri: 08:30AM - 05:30PM

  • USA

    1108 East Main Street, STE 906. Richmond, VA 23219

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Model Validation and Risk Management

Model Validation and Risk Management

The principle of Model Validation revolves around the defined processes and activities that verify models are executing as required. Leka Research Institute (LRI) offers top-level Model Validation services to meet the precise needs of our clients. We have completed over 156 Model Validations for banks and asset managers across multiple model types from valuation to risk management. The LRI performs Model Validations based on a rigorous, organized, and well-defined framework consistent with a complete and accurate understanding of the OCC 2011-12 and FRB (SR 11-7) requirements on model risk management. Besides, LRI conducts performance monitoring and outcomes analysis which is not limited to back-testing, benchmarking, stress testing, and sensitivity analysis. The LRI has worked with major Wall Street Banks and successfully validated the following risk management compliance models:
  • Credit risk modeling (CECL – PD, LGD, EAD), CECL quantification, implementation, challenges, and governance.
  • Allowance for Loan and Lease Loss (ALLL).
  • Retail (commercial lending, mortgage prepayment, credit cards, auto loans).
  • AML/BSA Pre-Provision Net Revenue (PPNR) models using a combination of multivariate analysis such as regression analysis and ARIMA.
  • Market risk models such as value at risk (VaR), interest rate, and cash flow modeling.
  • Wholesale (Commercial and Industrial, Commercial Real Estate).
  • Credit risk forecasting, including portfolio credit monitoring.
  • Delinquency models and decay (attrition models), loss severity, and roll rate model
  • Scenario design/macroeconomic and time-series regression-based models (CCAR, DFAST, and BHC stress testing)
  • Liquidity, Treasury, and Operational risk models

Enterprise Risk Management (ERM)

Enterprise Risk Management (ERM)

Enterprise risk management (ERM) is an organized, consistent, and continual risk management process that is applied organization-wide. It allows companies to address and understand material risks in a better manner.

LRI’s ERM is a strategically designed and planned business strategy with objectives to identify, evaluate, formulate and prepare for any threats, risks, and other potentials for disaster—both corporal and symbolic—that may interfere with any business’s operations and objectives.

Governance

Governance

Governance ensures efficacy and applicability to one’s business environment, especially during times of considerable changes and uncertainty. LRI supports companies to review, evaluate and enhance their governance framework and related business practices.

Regulatory Compliance Management

Regulatory Compliance Management

Today almost every business has to comply with various regulations, corporate policies, and standards that become the basis to govern the conduct of a business. Complying with this enormous and complex set of obligations is difficult in any situation.

LRI helps banks and other financial institutions steer the complex and continuously changing world of regulatory compliance by developing sophisticated systems that allow businesses to address regulatory challenges in real-time.

CECL is the most significant and one of the biggest changes in the current decade. It has changed how financial institutions such as banks and non-depository lending institutions estimate their credit losses against their loans and debts. CECL administers the recognition and measurement of credit losses for loans and debt securities. CECL allows for several approaches to calculate these losses. While CECL enables other approaches, here's a run-down of the six CECL methodologies applicable to the most significant subset of assets and institutions.
  • Vintage: This model tabulates the historical losses by vintage/loan age as a percentage of vintage year origination balances.
  • Loss Rate: This model calculates the average lifetime loss rate for historic static pools within a section. This average lifetime loss rate forms the foundation to forecast the lifetime loss rate of the existing static pool.
  • PDxLGD: In this model, the loss rate is calculated based on the same static pool concept as that of the Loss Rate method. However, under this method, the lifetime default rate (PD) and the loss-given default (LGD) are the two functions of the loss rate.
  • Roll Rate: This method depicts ultimate losses based on historical roll rates and the historical loss given default estimate.
  • Discount Cash Flow (DCF): A loan-level method translates expected future cash flows into a present value.
  • Weighted Average Remaining Maturity (WARM): Suitable for smaller, less complex institutions. Average annual charge-off rates and remaining life used by the WARM method estimate the allowance for credit losses.

Pre-provision net revenue (PPNR) measures the net revenue from spreads and non-trading fees. It is similar to operating revenue but excludes credit losses, markets and trading revenue, and losses stemming from operational risk.

Creditors use these models to determine the level of credit risk related to extending credit to a debtor. These models also provide information on the status of a borrower’s credit risk at any particular time. Listed below are some of the models one should consider when assessing the level of credit risk:
  • Probability of Default (PD)
  • Loss Given Default (LGD)
  • Exposure at Default (EAD)

AML regulations were built and forced with the sole purpose of preventing money laundering. Financial institutions should follow a series of AML procedures that the regulators publish. With the implementation of AML solutions, financial institutions can benefit from:

  • Notably Lesser Work
  • Enhanced Detection
  • Improved Customer Profiles
  • Reduce False Positives
  • Potential SARs Job Prioritization