Validation Standards
From Open Risk Manual
Definition
Validation Standards (Also: Validation Criteria, Model Acceptance Criteria) denotes a set of quantitative and qualitative guidelines for assigning a Model Risk score or other type of assessment to the reviewed or validated financial model
Usage
Validation standards are used to facilitate evaluation of model risk in a transparent, fair and consistent way. The standards based assessment / score can be then used to determine model acceptance, or for an existing model, the necessity and urgency of any model risk mitigating action.
Issues and Challenges
- In less mature Model Governance environments the validation standards may be missing, inconsistent across areas or lacking sharp operational outcomes
- It can be very difficult to formulate entirely mechanistic standards for accepting or rejecting models, particularly for complex models
- On the other hand, once a large family of similarly structured models is accepted as a valid category, its new validation may become a mechanistic exercise that avoids to revisit the in-principle suitability of the model category
