CECL Model Validations
The Financial Accounting Standards Board (FASB) introduced the current expected credit losses methodology (CECL) in June 2016. As of January 2023, all financial institutions were required to convert to this new accounting standard.
The Norman Group’s CECL Model Validation review is patterned off agency guidance to ensure models are performing as expected, and in line with their design objectives and business uses. Effective model validation helps to ensure the adequacy and effectiveness of the controls provided by the system and relied upon by management by including the key elements of a comprehensive model validation: Evaluation of Conceptual Soundness, Ongoing Monitoring, and Outcomes Analysis.
In addition to the key elements outlined above, the CECL Model Validation will ensure the following items are reviewed and documented:
- Ownership and control of the system, including determination of access rights.
- Review of recalibration decisions and documentation to support any changes to the system.
- Transaction testing as deemed necessary, selecting sample sizes based on risk and
- Transaction code mapping and testing inputs to the system.
- Review of any elements not captured by the system including procedures for alternative monitoring.
- Review of vendor provided developmental evidence outlining the product components, design, and intended use, to determine whether the model is appropriate for the financial institution’s products, and risks, including vendor provided testing results.
- Verification vendor conducts ongoing performance monitoring and outcomes analysis, with disclosure to the financial institution.
- Verification the financial institution’s customization choices were documented and justified.
- Verification the financial institution conducts ongoing monitoring and outcomes analysis of vendor model performance using the financial institution’s own
- Determination of model integrity and accuracy of system