WASHINGTON
Comptroller of the Currency John C. Dugan said today that responsibility for
validating the models banks use to manage credit risk and other critical
activities lies first and foremost with the institution itself.
Just as good management
requires this kind of attention to one critical component of your successyour
peoplemodel validation takes on the same importance as part of sound
management, as models become more central to the success of your
organizations, Mr. Dugan said in a speech at the OCCs Workshop on Validation
of Credit Rating and Scoring Models. Organizations using these models need to
be as sure as they can that models work as intendedthat is, that the models
are validmuch as they need to know that key people are doing their jobs.
Comptroller Dugan said
that regulators have the responsibility to establish clear expectations around
model validation for the institutions they supervise, and then to ensure
through the supervisory process that banks are meeting those expectations.
This viewthat banks
validate, and supervisors superviseis the OCC view of model validation, one we
express consistently through our guidance and our supervisory processes, Mr.
Dugan said. But it is also a view
shared by many other regulators, and a view that is becoming ever more
prevalent as we share practices with our colleagues around the world.
The
Comptroller said he has been particularly impressed with the work done by the
OCCs Risk Analysis Division, which brings the knowledge and perspective of
economists to the agencys supervisory work.
Whether its shifting through economic and industry trends to spot
emerging issues that the OCC needs to stay on top of, or evaluating the
economic impact of policy proposals, oras with this conferenceaddressing
issues raised by banks use of quantitative models, the OCCs economists bring
a dimension to our supervisory work that is irreplaceable, Mr. Dugan said.
Ive become increasingly proud of their capabilities and the
contributions they make to our supervision of banks, which with nearly $6
trillion in assets engage increasingly in the kind of complex activities that
require more sophisticated supervision.
The interests of banks
and regulators in validation do coincide in that both want models to work well,
Mr. Dugan told the 400 modelers, regulators, economists, and other experts in
attendance. However, because regulators
have different objectives and legal responsibilities from the private interests
of banks, conflicting views occasionally occur about what should be done on
modeling and validation, he said.
When that happenswhen
the occasional but inevitable conflicts arisewe work very hard with our banks
to reach an appropriate solution that works, consistent with our statutory
responsibility to the public, Comptroller Dugan said.
Mr. Dugan said that the
OCC is keenly aware that individual banks are different and require different
supervisory approaches to meet the same objectives and that supervision cant
be one size fits all. A smaller, less
complex bank needs a different supervisory approach than a diversified,
multi-billion dollar organization, he noted.
When it comes to
supervision of banks use of models, at the OCC we believe that success
requires recognition of the priority, and then seamless integration into the
mainstream of bank supervision, Comptroller Dugan said. Recognition of the priority begins at the
top, and that includes me.
OCC examiners draw on
the advice of staff quantitative experts when they assess how a bank uses any
quantitative model, the importance of that model within the business process,
and the controls that surround and govern its use, he said. Its a partnership, and one that works well.
Ultimately, the
bottom-line judgment regarding the use of models and how they affect the
condition and soundness of the bank rests where we firmly believe it shouldin
the hands of the examinersbut that judgment will have been the result of close
collaboration between the examiners and the OCCs quantitative modeling
experts, Comptroller Dugan said.
Mr. Dugan said that the
new Basel II capital framework will add greater importance to sound validation
practices. Validation is likely to be
an essential factor ensuring that models and other parts of banks internal
processes used for Basel II meet the requirements for capital calculations, he
said.
Comptroller Dugan
cautioned that no model is perfect.
Every model relies on some key assumptions, reflecting a simplified view
of the real world that never matches those assumptions perfectly. Thats why model results cant be blindly
accepted as the answer on capital adequacy or anything else for that matter,
he said.
Models dont build
themselves, and they dont validate themselves, Mr. Dugan said. Validation is done by people, people who
exercise judgment, judgment that can be good or can be bad. This is part of the process, and will always
be part of the process.
If I can leave you
with one primary thought, its that when your business depends on these models,
good validation has to be viewed as part of sound management and good corporate
governance, Mr. Dugan concluded. And
without good governance and management, we dont have a prayer of having sound
banks.
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The Office of the
Comptroller of the Currency was created by Congress to charter national banks,
to oversee a nationwide system of banking institutions, and to assure that
national banks are safe and sound, competitive and profitable, and capable of
serving in the best possible manner the banking needs of their customers.