Vendor Risk Model

From Open Risk Manual

Definition

Vendor Risk Models are any risk quantification systems (including data and algorithms) that are in use by a firm / organization without having been developed in-house

Regulated financial institutions are subject to additional requirements in relation to vended risk models

ECB TRIM Requirements

The requirements to use an IRB approach, including own estimates and CCFs, apply also where an institution has implemented a rating system, or model used within a rating system, that it has purchased from a third party[1]. To comply with this provision, institutions should ensure in such cases that all relevant internal information for model development and parameter calibration is taken into account.

In particular, long-run averages (LRAs) of default rates, loss given default (LGD) and CCFs based only on internal data should always be computed and considered for calibration. The institution remains responsible for the performance of the rating system or model.

References

  1. ECB guide to internal models - Credit Risk, Sep 2018

Contributors to this article

» Wiki admin