CISI Risk - Chapter 8 Flashcards
Three limiting assumptions regarding models?
The shape of any distribution used by the model
The relationship between the past and future
The state of the business environment at the point the model was deigned
Limiting assumptions - What does the shape of an underlying distribution mean?
If the model was designed for normal distribution, it will be unsuitable for normally distributed
Limiting assumptions - What does the relationship between past and future mean?
Many models assume that the future will be similar to the past
Limiting assumptions - What does the state of business environment mean?
The environment will have changed since the model was developed, depreciating their useful ness and accuracy overtime
What is the risk with confidence levels used in VAR?
It does not account for whats outside of the confidence level
Why is stress testing important to VAR?
Understanding extreme outcomes in which the confidence level does NOT capture
The shorter the time lag in the model the what?
Easier to gauge the models accuracy
Main limitation of modelling with AI
They can be biased, leading to inaccurate decisions & predictions
2 other limitations of modelling with AI?
Complex and difficult to interpret
Expensive to develop
What is Operational Risk Scenario Modelling
Calculation of sufficient capital to guard against unexpected operational risk losses.
What team members are risk workshops usually held with>
Senior risk and business personnel.
What two metrics are used to calculate Credit Risk VAR
Standard Deviation and Credit Migration Probabilities
What three things does the Workshop capture?
The frequency
The typical loss
The severity of the loss
How are Operational Risk Loss Events distributed
Not normally, they have fat tails and often simulated with Lognormal distribution
What is Market VAR?
Max loss a firm can make with a specific confidence over a specific time period
What are the two elements of a sound model risk governance framework?
.
Roles and Responsibilities of staff members
Use of polices and procedures and the importance of model inventory and good documentation
Who performs model risk governance?
Board of directors and Senior Management
Who is ultimately responsible for the Model Risk Framework
Board of directors
Who generally does the Model Risk Framework get delegated to?
Senior Members
What are the 5 duties of a senior manager in the Model Risk Framework?
Establishing polices & procedures
Assigning staff
Oversight
Establishing model risk controls
Recognizing the need for change
What function should asses the overall effectiveness of the model risk management framework?
Internal audit
5 aspects to Model Risk Management
model risk definition
assessment of model risk
acceptable practices for model development, implementation and use
appropriate model validation activities, and
governance and controls over the model risk management process.
What is model risk
model risk is the risk of loss resulting from using insufficiently accurate models to make decisions
