Risk Model Development and Mitigation

Strong risk management requires robust risk measurement and quantification. "How much risk do we have" is often the most basic yet most difficult question to answer. Along with governance, policy, experience, and proverbial "sniff test", risk modeling serves as one tool to manage exposure. Risk models should transparently quantify the amount of risk and communicate it in an intuitive manner. An institution's modeling approach and capability is often one of the key differentiating factors in evaluating its overall risk management capabilities. When it comes to enterprise-wide risk management, we believe that programs should begin with a clear articulation of the function's objectives and scope; identify the governance, management, and measurement requirements needed to succeed; and maintain a strong discipline in remaining focused on accomplishing the original overarching objectives.

KCI constructs or refines critical risk management models in areas that include: credit stress testing, asset/liability management, economic capital allocation, funds transfer pricing (FTP), liquidity measurement, loan pricing, risk grading, balance sheet optimization, and strategic valuation. We also have an active practice in developing leading viewpoints on enterprise-wide risk management and topic-specific assessment models that are customized to an individual client's particular focus.

How We Work

KCI's model assessment approach is distinctive in its focus on linking model outcomes to strategic business decisioning. We begin with a simple question: "What should this model tell us in terms of risk management and how should we use it to make better business decisions?"

Alongside modeling risk, risk-adjusted performance measurement is a critical tool for business management as it encompasses a set of capabilities including: economic capital allocation, funds transfer pricing (FTP), cost allocation, and establishing return requirements. Risk-adjusted reporting should consistently support: management reporting, pricing models, incentives, strategic communication strategies and other key activities. The impact of the global financial crisis and the pending changes to financial regulatory requirements have made getting this capability right increasingly important.

Industry Sub-Segments

KCI only develops software in support of our specific client engagements or for internal research therefore our assessments and recommendations are independent of any third-party vendor constraints. The end product should be a developed model or model review process that is completely transparent to the client and capable of ongoing maintenance after the consulting engagement. Thus, in undertaking model assessment we focus on various key aspects of the business to create a model that simply just works.

Practice Area Service Offerings:
  • Aligning models with strategic decision making objectives
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  • Affirming the conceptual construct of modeling tools
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  • Validating key assumptions that are critical in driving results
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  • Expanding the use of models to support risk/reward decision frameworks
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    While many institutions have made significant advancements in the deployment of more sophisticated models, we often find that more of their efforts are focused on model validation rather than modeling assessment. From KCI's perspective, a periodic challenge of assumptions as well as alignment between the model's framework and management's decision making objectives enable banks to both mitigate key deficiencies and extract additional strategic value from these tools.


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