This two day training seminar covers the key aspects relating to model risk management as practiced by leading financial institutions. The course addresses common issues of model design inadequacy, parameter flaws, interpolating and bootstrapping errors as well as reliance on back testing on out of sample data sets from a practical viewpoint. Issues of regulatory compliance and governance, policies and controls get addressed from a functional perspective with an aim to achieve efficiency with respect to dealing with model risks in banking.
The first day commences by addressing some critical aspects of internal credit rating models while identifying potential areas of malfunction that can lead to disastrous consequences. It follows by examining typical shortcomings of pricing models as well as market risk models. A special case discussion revolves around the traditional paradigm of "single pricing formula" for capital market securities and derivatives, whereby stress situations have shown that pricing can be highly state dependent. The course depicts best practices used by leading institutions aimed at augmenting such deficiencies.
During the second day, we will discuss model risks associated with approximations within capital models and specifically credit portfolio models. Another topic covered represents potential traps inherent within the complex CVA counterparty models that rely on potential future exposure estimations – errors which can be conducive to false hedging decisions when applied by CVA desks.
Lastly, we will examine model risk inherent in modern stress testing models and we will propose some mitigating measures as seen in leading international banks.