I do agree with all what was said regarding the choice of having internal group instead of hiring external firms. As stated, it is better to keep the knowledge internally and build a robust team able to challenge the modelers instead of dealing with external consultants that usually will not get deep into details like the internal independent team does usually.

I believe the Validation is a very important part in Risk Management in the banks. Also as it was noticed, validation is a difficult matter that requests a deep knowledge of all the modeling methodologies, regulatory requirements….Also very importantly, you should have good PR skills in order to deal with difficult situations that will be raised sometimes when dealing with the modeling teams. It can be hard sometimes! Finally, another important point is to be able to assess the importance of the findings especially for the qualitative points!

Rgds.

I actually head an internal but independent risk models validation team at Stanchart. What you’ve stated about external vendors is absolutely spot on and exactly the same reasons, why the FSA wants all validation work to be performed in-house. Eventually, all the banks will realize that validation is an important Pillar as part of Pillar 2 requirements. thanks.

What’s important is that the validator knows what issue is material to the business and what is immaterial. But most of these internal validators are usually quant-background, it’s not an easy thing to bridge the gap.

I can’t agree more. Transfer of knowledge between consultants and employees of the company is always going to be difficult (you have highlighted some of the reasons). An Internal validation team, depending on their experience (in general) and number of years with the company, can add much more value.

At our company we have established a completely seperate model build and model development team, in order to address the independence requirement stipulated by Basel II.

I want to raise a seperate issue: initial model validation. We are struggling to determine whose responsibility this actually is (development team vs validation team). A few things to consider here are the impact that initial validation has on the “operating model”, i.e. from model development/enhancement to implementation to ongoing validation. Antoher issue would be independence.

I’d love to have a few more views on validation in general, and on initial validation specifically.

default location is here: C:\Program Files\SAS\SAS 9.1\nls\en

I’ve been working on the intermediate approaches (delta plus and scenario matrix) to measure price risk of options. In the delta plus approach, we need to determine the delta, gamma and Vega weighted capital charge. The computation of gamma capital charge requires variation of the underlying as an input. I’m having difficulties in identifying the underlying in case of some complex options such as option on a bond future, option on a forex forward. If I take price of the bond future as the underlying and proceed further to calculate the gamma and Vega capital charge, then that won’t be according to Basel norms because Basel only defines time bands, bonds, equities, and commodities as underlying. (Refer to the new Basel amendment to accommodate market risks updated 2005, page number 32).
If I use a two legged approach and convert a complex instrument into two notional positions, then I’ll be able to determine the delta weighted capital charge. But again in case of gamma and Vega capital charge, what should go in as “variation (VU)” of the underlying?
For example going forward with the capital charge computation of option on a bond future, which variation of the underlying should be considered? Should it be variation of the price of a bond future, variation of market value of bond or variation of interest rates?
Any help in this regard would be highly appreciated. Thanks.

Hi
Isn’t it the other way around? It would be a PIT estimate?

as a remark, when sas terminates unexpectedly, it does not empty its own “work” folder. consequence, i had gigs of files on my hard drive left on the sas “work”. and the windows search engine seemed to ignore these files, so i had to delete them manually.

also i find it useful to see the progress of these files when sas is doing heavy computations, hence i reassigned the “work” folder according to your instructions.