Validating financial models creative dating ideas ds

Importantly, organizations should ensure that the development of the more judgmental and qualitative aspects of their models is also sound.

All models have some degree of uncertainty and inaccuracy because they are by definition imperfect representations of reality.

Model validation is the set of processes and activities intended to verify that models are performing as expected, in line with their design objectives and business uses.

Effective validation helps to ensure that models are sound, identifying potential limitations and assumptions and assessing their possible impact.

All model components—inputs, processing, outputs, and reports—should be subject to validation; this applies equally to models developed in-house and to those purchased from or developed by vendors or consultants.

Validation involves a degree of independence from model development and use.

Overall, the quality of the validation process is indicated by critical review by objective, knowledgeable parties and the actions taken to address issues identified by those parties.

Validation activities should continue on an ongoing basis after a model goes into use to track known model limitations and to identify any new ones.However, where models and model output have a material impact on business decisions, including decisions related to risk management and capital and liquidity planning, and where model failure would have a particularly harmful impact on a bank’s financial condition, a bank’s model risk management framework should be more extensive and rigorous.Model development relies heavily on the experience and judgment of developers, and model risk management should include disciplined model development and implementation processes that are consistent with the situation and goals of the model user and with the banking organization’s policy.Model risk can lead to financial loss, poor business and strategic decision-making, or damage to a banking organization’s reputation.Model risk occurs primarily for two reasons: model may be used incorrectly or inappropriately or there may be a misunderstanding about its limitations and assumptions.Validation is an important check during periods of benign economic and financial conditions, when estimates of risk and potential loss can become overly optimistic and the data at hand may not fully reflect more stressed conditions.

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