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Hi. I am Howard Lothrop host of Echo Partners TV. Today we're going to talk about something
that's a common shortcoming in asset liability models. In fact, it's probably the most common
shortcoming I see when I evaluate the asset liability process at almost every bank. And
that is the lack of a timely detailed and accurate independent third-party model validation
opinion. Well, what is a model validation opinion? A model validation is one of three
components required by the regulatory standard for you to demonstrate the quality of your
asset liability modeling process. Model validation talks about testing and benchmarking the mathematical
algorithms within the model itself. Because of course if the model doesn't perform calculations
accurately you pretty much have no hope of a high-quality result and you might not know
this and it could lead you to make poor decisions. Oftentimes what we find is that a vendor may
have provided a validation opinion. It might not be independent or might not be a third-party
opinion and almost always it's out of date. Regulatory best practices tell a model vendor
that they should provide an updated independent third-party model validation opinion any time
there is a significant change in the model. I don't know about you, but I've looked asset
liability management of the past few years and seeing all the regulatory changes that
come down the pike and I look at the the upcoming changes. I would have to conclude that that
means I should get a new up-to-date third-party independent model validation opinion from
my vendor at least once a year. This is most easily obtained when it's renewal time. Because
a vendor wants to keep you happy. Even between periods though this should be a requirement
for any model vendor. If they don't have it, just send them the regulatory guidance. I'll
be glad to give it to you as as a citation and tell them you need it. It is the number
one thing that is it we find lacking in asset liability process and it also is one of the
best things you can have when that regulator comes calling at the beginning of your interest
rate risk exam. Reach in the file. Show them the up-to-date timely third-party independent
model validation opinion. Give it to your regulator, and it's a step in the right direction
and it's one more item crossed off the regulatory to-do list. Thanks very much. Look forward
to seeing you on the next episode