Ms. Estelle Jonkergouw is Senior Vice President at Rabobank Netherlands and has a PhD in Econometrics. She established the credit risk modeling unit within the Rabobank which was until recently responsible for the development as well as the validation of credit risk models. She is currently head of the Risk Model Validation and Methodology team within the Group Risk Management department at Rabobank. In this capacity she is responsible for the validation and review of all risk models developed within the Rabobank Group for Bazel II and Economic Capital purposes. Estelle gave us some insights on risk modeling after the 2nd Annual Enterprise Wide Risk Management Forum (14-15 February 2008 in Amsterdam).
1. What are the dangers of model risk?
As important strategic decisions are more and more based on the outcome of models, the danger of model risk is that important decisions are taken on flawed models, without knowing. The danger is then that this can result in incorrect decisions being taken.
2. What are the requirements throughout the model life cycle?
Strict requirements should hold throughout the model cycle as to ensure that models are developed properly, that all information has been taken into account (both statistically as well as from relevant experts), that the models are adequately and thoroughly validated to ensure robustness, that the models are implemented correctly in IT systems as well as in processes and procedures (use of the models) and lastly but not the least that the performance of the models are assessed regularly as to ensure that the models keep on performing well.
3. What are the key principles of model validation?
Model validation is a continuous process and should assess both the quantitative (statistical) aspects as well as the qualitative aspects. Validation should also not only assess the methodology followed, but also the process followed during development as well as the compliancy to internal and external requirements.
4. How to mitigate risk by modeling governance structure?
Model risk can be mitigated by a strong governance structure that ensures a division in roles and responsibilities with regard to development and validation. The validation function should be independent from the development as to ensure an adequate, critical validation process. Furthermore the performance of the models needs to be assessed on a regular basis as to ensure that the models perform well and to highlight the strengths and weaknesses in the models .so that these are known in the decision process.
5. Are such governance frameworks applicable for non-risk models (e.g. product related models) as well?
Yes, the governance framework can be generalized as to be applicable to all models developed and used within the financial institution
6. What are the linkages between risk management and internal audit function?
While the validation function fulfils the function of second line of defence, the audit function acts as third line of defence ensuring the validation function is adequately conducted. In such a way they also help to evaluate and improve the effectiveness of risk management, control and governance processes.
7. How do you review credit risk models at Rabobank?
We are confident that the models perform well and as we on a regular basis thoroughly evaluate and improve the models, we thereby ensure that the models can be used with confidence in the different decision processes.
8. How did you like the conference? What was the key outcome of the event for you?
Very good conference - not too big and thus a super event for networking.
Conducted in February 2008 in Amsterdam
