Executing effective validations in 2011
One of the key components to successfully utilizing risk management models and decision analytics is an effective validation. When executed properly, model validations verify that models are performing according to expectation within their original design and purpose. Effective validations also confirm that models remain sound, even amidst changing environments, while identifying and measuring the impact of any potential limitations or errant assumptions.
Regulators are also stressing the importance of model validation. In April 2011 the Office of the Comptroller of the Currency (OCC) expanded long-existing guidelines about model validation in response to the lending industry’s increasing reliance on models to drive decision making. As part of its guidance, the OCC explicitly recommends that financial services firms utilizing predictive models and decision analytics perform regular validations to gauge model efficacy. The OCC’s guidelines apply both to lenders that utilize proprietary models and, importantly, those that use vendor generated models where there might not be the same transparency and understanding in terms of how the model was built.
VantageScore Solutions recently completed its own validation of VantageScore® 2.0, the model’s second version, and enhanced its validation execution in accordance the OCC’s expanded guidelines. A webinar was then hosted in conjunction with American Banker to discuss the results and help risk managers perform their own validations in light of the OCC’s guidance on model risk management.