IFRS9 is live since January 2018 which means that after the introduction of new credit risk models, the costs of model risk management start to materialize in full.
The validation of IFRS9 models is crucial for multiple reasons. First of all, to guarantee regulatory compliance with the guidance on credit risk and accounting for expected credit losses published in 2015 by the BIS. Secondly to address the amount of model inputs and the complexity of the models (staging allocation, PIT vs TTC modelling, lifetime PD, segmentation, ...). And finally, to properly recognize the importance of the model outputs (impact on pricing, stress testing, capital, planning, etc.)
As is clearly highlighted in BCBS 350, a regulatory compliant model risk management process for IFRS 9 therefore consists of 4 different components:
- An IFRS 9 model validation framework describing the standards and principles of the validation
- A model validation methodology document mentioning the quantitative tests as well as the model risk tiering approach
- A periodic model validation documenting quantitative tests together with more qualitative analysis and a compliance model assessment.
- An on-going monitoring which is performed to detect degraded performance at an early stage