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Consolidating Supervisor / Home and Host Supervisor
• Supervision at the level of each legal entity but effective supervision = at group level (Basel 2 - risk management centralised)
Consolidated supervisor - responsibility at 2 levels: stand alone and consolidated (extra burden for the financial institution)
• Supervisors should act in a coherent way with harmonised regulation but :
Strengthening the role of the consolidated supervisor = political impact & Host supervisors have (legally) different responsibilities:
• National supervisor reports to national political bodies, must act in the interest of the country
• Financial responsibility towards their government (guarantees, etc.) • In case of crisis, the national supervisor will try to limit the impact on his country• Countries where foreign financial institutions play a major role are the most
CEBS - guidelines for cooperation between consolidating and host supervisors
• Consolidating supervisor conducts SREP (Supervisory Review and Evaluation Process) for the group as a whole
• Host supervisors conducts this review at the subsidiary level: • perform the SREP at local level,• assess the internal governance at local level, within the framework of the group• review and challenge the bank’s ICAAP (adequate capital), taking into account
the group’s level• review the local plan to close the gaps• and communicate its conclusions to the consolidating supervisor
• Home / Consolidating supervisor approve Application File after intensive review and dialogue and taking into account the feedback from host supervisors.
Consolidating Supervisor / Home and Host Supervisor
Validation over time1.1. Very useful – a generally accepted measureVery useful – a generally accepted measure
2.2. If a validation sample is used, the Gini should be If a validation sample is used, the Gini should be based on this – not the development samplebased on this – not the development sample
3.3. No absolute rules for “satisfactory” model strength No absolute rules for “satisfactory” model strength – but < 25% is poor, > 75% is good!– but < 25% is poor, > 75% is good!
4.4. Can be influenced by the default definition Can be influenced by the default definition
Create the
development sample
Rating criteria
(variables)
Model
Development
PD calibration
Model validation
ROC or CAP statistics, or ROC or CAP statistics, or GiniGini coefficients. coefficients.
B
ARandom Model
Developed Model
Perfect Model
All Clients
Defaults
Powerstat (P-Stat) = A
A+B
Risk Model Basel II Validation Technical Compliance
Risk Model Basel II Validation Technical Compliance
Technical Compliance
Does the model rank order? Does the model rank order?
Has the model used sensible characteristics? Has the model used sensible characteristics?
Has an appropriate model methodology been Has an appropriate model methodology been used?used?
Has validation down to characteristic Has validation down to characteristic analysis been undertaken – analysis been undertaken – e.g. marginal e.g. marginal chi-squared analysischi-squared analysis? ?
Has it been tested on different good / bad Has it been tested on different good / bad definitions?definitions?
Has it subsequently been used in practice by Has it subsequently been used in practice by the bank?the bank?
Risk Model Basel II Validation Technical Compliance
Technical Compliance
Two types: Two types:
““Hold out samples” – from same pool of Hold out samples” – from same pool of exposures as the development sample – exposures as the development sample – but a random 25%. but a random 25%.
All modelling performed on 75%All modelling performed on 75%
Validation on 25%Validation on 25%
Validation of characteristic analysisValidation of characteristic analysis
Validation on PD calibrationValidation on PD calibration
Validation on model powerValidation on model power
““Out-of-time samples” – from different pool of Out-of-time samples” – from different pool of exposures as the development sampleexposures as the development sample
Risk Model Basel II Validation Technical Compliance
Technical Compliance
A model A model should be re-validatedshould be re-validated each and every each and every month after implementation and reviewed yearlymonth after implementation and reviewed yearly
Similar characteristic analysisSimilar characteristic analysis
1.1. Similar score to PD calibrationSimilar score to PD calibration
Management empowerment is crucial for validation Model validation not an exact science : a model might assess relative quality of the
counterparty but it cannot capture all elements as it is based on portfolio analysis : this means : on average over time
Expert judgement is of critical importance : for modelling and for communication Data issues center around quantity not quality Regional difference in culture and modelling e.g. equity model versus debt model Use test of critical importance Cherry Picking / Materiality Issues Supervisory Teams : Quant and Process Specialist Interviews on the Spot Benchmarking with internal models or industry sampling ( Securitisation ECAI experience
• Head of CRO Executive Office, Counsellor to Chief Risk Officer, Member of Central Risk Management Team
Former Director of Corporate and Institutional Banking Business Support. Business Support ensures that counterparty risk assessment (reputation, credit, operational and strategic) are timely managed from the inception of a customer to its daily monitoring
Former Director of Credit Risk Management (Analytics, Reporting, Policy & Portfolio Management), Fortis Representative for Working Group On Capital Adequacy for Basel II Implementation (IIF)
Extensive Financial Markets Experience ( Option Chief Trader, Corporate Chief Sales, Global Head of Market Research, Fortis Representative for Market Risk IIF Task Force - Basel I Market Amendment)
Degrees in Applied Mathematics and Business Administration from the Catholic University of Louvain (Belgium) and the University of Western Ontario (Canada).
Registered EC Basel II Expert: Senior lecturer for EC sponsored programs : SME Financing (Europe -ESBG), Czez Basel II (Czech Republic – BBA – National Czech Bank), Basel II & Risk Management (ESBG – China Banking Regulatory Commission)
Senior Lecturer FEBELFIN & International Risk Confererences Publications : Treasury Risk Management 1996; Accounting, financial and fiscal aspects
of Derivatives, 1996 Personal : Fencing’instructor
(32-2) 565.56.00 3, Montagne du Parc B-1000 Brussels, [email protected]