Risk Model Validation

Senior management are expected to make crucial business decisions using complex risk models that, without specialized quantitative financial knowledge, can lead to ill judged choices. The recent controversial discussions concerning the use of risk models during the financial crisis, and the new regulatory framework, have highlighted the need for a consistent approach to answer the question What are risk models made for? and maybe even more importantly What are risk models NOT made for? . The report aims to explain: What risk model validation is; What risk models exist; How a risk model can fail; Which aspects of reality are included, and which aspects are excluded from a risk model; and How business decisions can be based on a risk models output. In addressing these issues, this report provides practical advice to the management of financial institutions and a toolbox to raise the key questions when it comes to integrating the results of quantitative models into business decisions.