OSFI advocates appropriate use of risk models

Appropriate use of modeling in the wake of the 2008 financial crisis will be a focus for the Office of the Superintendent of Financial Institutions (OSFI) in the coming months
OSFI superintendent Julie Dickson focused on the use of modeling in notes to a speech she delivered at the KPMG 2009 Annual Insurance Issues Conference in Toronto.
“I have often heard people say that the global financial crisis has demonstrated that the use of models was a fatal mistake by both regulators and by financial institutions,” Dickson said.
“Further, some say that the widespread use of models in the financial sector should be halted.
“This is the wrong conclusion to draw from the financial turmoil.
“In fact, financial institutions that proved to be the most resilient during the crisis, and who acted earliest to protect themselves, were institutions that used models as one part of an extensive tool kit, combined with strong risk management around their models.”
This is not to say that models do not come with associated risks, she said. Among them, models can suffer from:
•    flawed assumptions;
•    flawed methodologies;
•    inaccurate, incomplete or unstable data;
•    flawed implementation, including bugs or programming errors; and
•    flawed usage, including a misunderstanding of a model’s purpose and the inappropriate use of models in specific circumstances.
A good risk management culture in an organization can help manage the risks listed above, Dickson said.
“OSFI wants to see models used as part of a robust risk management culture,” she said. “In addition to models, a risk management tool-kit should also include stress testing (to see how the model responds to various changes in assumptions).
“Firms that performed well in the financial crisis were firms that had a big tool-kit….
“They effectively balanced the use of quantitative rigor with qualitative assessments.
“They used a wide range of risk measures to challenge views and discussed views in a disciplined fashion.”