Tag Archives: Validation

Risk & Compliance Model Management Best Practices: Part 5


Welcome to the latest Model Management Monday. This is the fifth in my blog series on model management, each post highlighting a best practice that supports both compliance and improved performance.   Best Practice #5: Validate Model Effectiveness Once you have developed a model, you need to validate that it works according to your business objectives. You also need to revalidate on an ongoing basis—once a year at a minimum, but more often in a dynamic economy and/or where policy changes may impact model effectiveness. The validation evaluates the stability of model inputs and outputs, and measures your model’s effectiveness. As models age, their predictive power diminishes. Regular validations provide an early indication that a model may benefit from a redevelopment or realignment. Overall, you should: Strive for clarity, consistency. Regulators want to see that you validate on a regular cadence, producing a consistent collection of reports, and that your process... [Read More]

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Risk & Compliance More Models, More Regulations, More at Stake


To some degree, we’re living in a world where we are cursed with our own success. Financial institutions have seen tremendous benefits from analytics, and as a result, they are using predictive models on an increasingly broader scale, to measure capital reserve requirements and manage complex customer decisions. But as my rap doppelganger would say: “More Models, More Problems.” The greater complexity and number of predictive models in use makes it even more difficult to track and manage model performance, not to mention comply with regulatory requirements. Since the financial crisis, banking regulators have increased their scrutiny of how institutions use predictive analytics. These days, regulators are not only concerned with the safety and soundness of the analytics themselves, in terms of how the models are built and whether they are still validating. Regulators are also focused on the impact of the decisions—that is, who gets a particular decision and... [Read More]

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Customer Engagement Join Us For FICO World 2014


Attracting, serving and protecting customers is getting tougher, so how are companies using predictive analytics to out-maneuver competitors and win customer loyalty? Join us at FICO World 2014 to discover answers from experts and network with your peers. Registration is now open for the conference, which will be held November 11-14 in San Diego, California.

FICO World has become the leading global conference on analytics-powered customer engagement strategies. This year’s theme, “The New Customer Imperative,” stems from the convergence of social, mobile and cloud, which is evolving customer behaviors and expectations, revolutionizing business and society, disrupting old business models, and creating new leaders. We’ll explore this theme through a number of sessions, speakers and events, including:

100+ presentations on analytic innovation, credit scoring, customer growth and retention, customer originations, debt management, fraud and security, mortgage lending, regulatory compliance, and small business lending.

Keynote presenters Theresa Payton,...

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Risk & Compliance Ace Your Next Regulatory Exam


Back in school, cramming for an exam may have been acceptable (although stressful). But it’s never the best option for lenders preparing for their next regulatory “exam” on model risk management. Fortunately, there’s no need to cram for an audit if you adopt good model management practices from the get-go. Your preparation must begin well ahead of an audit, a point made clear by the 2011 Supervisory Guidance on Model Risk Management issued by the US Office of the Comptroller of Currency (OCC) and similar guidance in the Federal Reserve’s SR 11-7. These guidelines require sound and robust processes for model development, validation, implementation, use and governance. This has always been good policy, but in the regulatory climate following the post-financial meltdown, it becomes even more critical. How can you make sure you’re prepared? Here are a few tips: Understand the scoring models you use, both those developed in-house as well as those from third-party vendors. The guidelines state that bankers must demonstrate a clear understanding of the...

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Risk & Compliance Ranking UK Consumers’ Credit Capacity


As the UK economy continues to improve, lenders are increasing lending again — in a survey that FICO will announce next week, 100% of UK risk managers who responded said that lending more to consumers was a priority for 2014, and 27% said it was a top priority. At the same time, lenders are cautious about taking on additional risk. This is what makes the FICO® Credit Capacity Index™ so attractive. This score rank-orders consumers by their ability to handle additional credit, which could be fundamental in helping UK lenders improve profitable lending growth. Our latest validations show the strength of the FICO Credit Capacity Index, built on Equifax’s market-leading risk score, Risk Navigator 4 (RN4). We applied CCI to 275,000 UK consumer credit applications for credit line increases, current accounts, credit cards and personal loans. The performance of these accounts a year later, as well as the estimated performance for consumers who were declined, showed that CCI used with RN4 strongly rank-ordered borrowers. For borrowers who applied for a current...

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Risk & Compliance Best Practices for Modeling Regulations


Financial institutions have had a difficult time adapting to the latest regulatory guidance regarding model validation and management. But making the right improvements can also translate into better analytic performance and risk management. To both comply and compete, it's critical to build an organizational policy for comprehensive model and credit policy management. This framework should include the following tried-and-true practices: Have clearly stated credit policies; review these regularly. We recommend reviewing these every six months since they have a direct impact on your bottom line. In the US, the Fed and OCC require a review of policies at least annually. Prepare a suitable data sample. Regulators require you demonstrate your model validation sampling techniques are complete, responsible and relevant, since incorrect or inaccurate sampling can impact model performance.  Ensure model segmentation transparency. In general, you’ll need to clearly document how you segmented subpopulations and how this supports business...

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Customer Engagement Join Us For FICO World 2013


How are companies using Big Data analytics to understand and collaborate with today’s connected consumer? Join us at FICO World 2013 to discover answers from experts and network with your banking peers. Registration is now open for the conference, which will be held April 30-May 3 in Miami. FICO World has become the leading international conference on analytic strategies. This year, we have a packed agenda with more than 80 presentations from 70 banks and retailers on fraud management, analytic innovation, risk management, collections and improving the customer experience (view a list of sessions). Attendees will also hear from keynote presenter Kenneth Cukier, data editor for The Economist and co-author of a new book on Big Data. Learn more or register for FICO World 2013.

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Risk & Compliance Why Model Governance Matters


Last month, my colleague Daniel Melo reported on a series of meetings he and IDC Financial Insights had held with European bankers on the subject of model governance. This is an increasingly vital issue for banks, insurers and other companies whose success depends on the quality of their analytics. Now you can read IDC’s thoughts in a new paper by Michael Versace, EMEA Banking – Model Governance Framework. In this paper, Versace states that, “Developing and maintaining strong governance, policies, and controls over analytics and model risk is fundamental to the effectiveness of business strategies and financial decision making. A weak governance function reduces the value of modeling investments and quality of overall enterprise risk management programs.” As Versace points out, model governance unites the twin concerns of risk management and regulatory compliance. IDC Financial Insights posits a set of model governance best practices, summarized here: Inventory and classify all models Develop and adopt standard production and deployment processes ...

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Risk & Compliance Wanted: reliable models to combat “rising systematic and systemic risks”


I recently attended an engaging conference jointly hosted by The Risk Management Institute and National University of Singapore that explored “risk management responses to rising systematic and systemic risks.” Among its distinguished speakers were various local and international banks, professors from NUS and National Taiwan University, the Federal Reserve, IMF and the Monetary Authority of Singapore. From the discussions, one issue was exceptionally clear – understanding models, and whether they work or don’t, is increasingly important in a financial world that has become so volatile.  Predictive accuracy and model reliability have come under tremendous regulatory scrutiny. Adding to this challenge is the fact that data-driven tools become less and less reliable as time goes by. Because of this, regular and effective model validations have become critical. According to US regulators, models can improve business decisions, but they also impose risk, including the potential for adverse consequences from decisions based on models that are either...

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Risk & Compliance Webinar: Best Practices in Analytics and Model Validation


Next week, FICO will host free webinars that share best practices in analytics and model validation. With the proliferation of models used in financial services, and today's tightly regulated and volatile markets, organizations must reassess how well models are being strategically applied and how well they're being managed. In addition, organizations are facing increased scrutiny from banking regulators, particularly from the OCC and the Basel Committee on Banking Supervision. In the webinars, we'll discuss real strategies and techniques used to build, deploy and monitor robust, transparent, decision-improving predictive models. You'll learn: How lenders can rapidly deploy, track, validate, monitor and manage broad sets of models and products to improve the bottom line and address regulatory compliance Best practices that improve flexibility, accelerate the modeling lifecycle and drive business growth How to streamline compliance and reduce costs/liabilities of ongoing audits Webinar Title: Analytics and Model ValidationFICO...

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