Martingale Solution Group can set up Texas state-chartered banks for successful Texas Department of Banks’ (TDB) examination of their Model Risk Management (MRM) systems. In this note I cover the TDB Model Risk Management exam evaluation factors and the minimum requirements for a Model Risk Management framework.
The Texas Department of Banking’s examiners will execute the steps in the State Commercial Bank Examination Procedures to assess the health of state-chartered banks’ MRM structures. The state’s MRM evaluation factors are listed in Table 1 below.
Table 1-Texas Department of Banking Examination Evaluation Factors for Model Risk Management
| State Examination Procedure | State Evaluation Factor |
|---|---|
| CECL Commercial Bank Examination Procedures, #2 – Allowance for Credit Losses | Determine the effectiveness of the system of internal controls over the Allowance for Credit Los (ACL). Assess the adequacy of independent testing and validation of the Current Expected Credit Loss (CECL) model. |
| Interest Rate Risk (IRR) Commercial Bank Examination Procedures, #10-Funds Management | Review the last examination, most recent internal/external independent review (encompassing audit, model validation, model risk management, etc.) and correspondence to identify any recommendations, violations, Matters Requiring Attention, or regulatory enforcement actions. Determine Board and Management’s efforts to comply with or correct noted deficiencies or concerns. Determine conformance with the Joint Agency Policy Statement: Interest Rate Risk (1996) (Federal Register version) and Part 364 Appendix A Section II.E. |
| Bank Secrecy Act / Anti Money Laundering (BSA/AML) Commercial Bank Examination Procedures, #28-Bank Secrecy Act / Anti-Money Laundering | Surveillance (Automated Accounting) Monitoring Determine whether the programming of the methodology has been independently validated. |
The key components of the three types of model validation reports required by TDB are as follows:
- Assessment of the model development evidence
- Assessment of the model performance monitoring
- Assessment of model output analysis
In addition, TDB will assess an institution’s model governance process, i.e., remediation of findings identified by the independent model validation unit.
Regardless of complexity, state-chartered commercial banks in Texas are expected to validate, document, and adjust their CECL, IRR and BSA/AML systems to comply with TBD rules and regulations. These rules exist to ensure that Texas has a safe, sound, and competitive banking system. Contact the Martingale Solution Group team today to discuss how your bank can leverage a model validation and appropriately manage model risks associated with the growing financial services industry and ace your next bank examination.
