RBS 2008 Annual Report Download - page 86

85RBS Group Annual Report and Accounts 2008
Model validation (audited)
The performance and accuracy of credit models is critical, both in
terms of effective risk management and also the calculation of risk
parameters (PD, LGD and EAD) used by the Group to calculate
RWAs. The models are subject to frequent validation internally and,
if used as part of the AIRB Basel II framework (see page 82), have
been reviewed and approved for use by the FSA.
Independent model validation is performed by the Group. This includes
an evaluation of the model development and validation for the data set
used, logic and assumptions, and performance of the model analysis.
Where required, the Group has engaged external risk management
consultants to undertake independent reviews and report their findings
to the Wholesale or Retail Credit Model Committee. This provides a
benchmark against industry practices.
The validation results are a key factor in deciding whether a model is
recommended for ongoing use. The frequency, depth and extent of the
validation are consistent with the materiality and complexity of the risk
being managed. The Group’s validation processes include:
•Developmental evidence: to ensure that the credit risk model
adequately discriminates between different levels of risk and delivers
accurate risk estimates.
•Process verification: whether the methods used in the credit risk
models are being used, monitored and updated in the way intended
in the design of the model. Initial testing and validation is performed
when the model is developed with the performance of models being
assessed on an ongoing basis.
Group Risk Committee
Group Models Committee
Wholesale Credit Model
Committee
Retail Credit Model
Committee
Technical review of all models
Approve low materiality models
Approve high materiality models
Approve medium materiality models