Indicator
Bank must periodically, but no less frequently than annually, review its internal models in light of developments in financial markets and modelling technologies, and enhance those models as appropriate to ensure that they continue to meet the regulator’s standards for model approval and employ risk measurement methodologies that are most appropriate for the bank’s covered positions.
All internal models are subject to upfront full vetting and validation process, prior to use. All approved models are subject to ongoing scheduled reviews by Model Risk Validation, with input from model owners and users. An annual review and attestation process is conducted among model users and model owners, to ensure that the models are effective for current use, and any identified deterioration in model performance, or change in financial markets or modelling technologies/practice are reflected in possible modification or redevelopment of the model.
We define here a number of performance indicators for the VaR model, together with traffic lights (“Red”, “Yellow”, “Green”) indicators or zones, in the spirit of the backtesting framework introduced by Basel Committee. For each of the performance indicators, the Green zone corresponds to results that do not suggest a problem with the quality or accuracy of the model, the Yellow zone corresponds to results that do or should raise questions in this regard but, where any conclusion is not definitive.
Finally the Red zone indicates a result that almost certainly is problematic and potentially due to a problem with the model, the data or fundamental or is reflective of fundamental changes in market environment that render the model inapplicable.
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