PNC Bank 2014 Annual Report Download - page 103

Model Risk Management
PNC relies on quantitative models to measure risks, to
estimate certain financial values, and to support or inform
certain business decisions. Models may be used in processes
such as determining the pricing of various products, grading
and granting loans, measuring interest rate risks and other
market risks, predicting losses, and assessing capital
adequacy, as well as to estimate the value of financial
instruments and balance sheet items.
There are risks involved in the use of models as they have the
potential to provide inaccurate output or results, could be used
for purposes other than those for which they have been
designed, or may be operated in an uncontrolled environment
where unauthorized changes can take place and where other
control risks exist.
The Model Risk Management Group is responsible for
policies and procedures describing how model risk is
evaluated and managed, and the application of the governance
process to implement these practices throughout the
enterprise. The Model Risk Management Group, a subgroup
of the Enterprise Risk Management Committee, oversees all
aspects of model risk, including PNC’s compliance with
regulatory requirements related to model risk management,
and approves exceptions to policy when appropriate.
To better manage our business, our practices around the use of
models, and to comply with regulatory guidance and
requirements, we have policies and procedures in place that
define our governance processes for assessing and controlling
model risk. These processes focus on identifying, reporting
and remediating any problems with the soundness, accuracy,
improper use or operating environment of our models. We
recognize that models must be monitored over time to ensure
their continued accuracy and functioning, and our policies also
address the type and frequency of performance monitoring
that is appropriate according to the importance of each model.
PNC also monitors key metrics designed to assess our level of
model risk and its alignment with our risk appetite.
There are a number of practices we undertake to identify and
control model risk. A primary consideration is that models be
well understood by those who use them as well as by other
parties. Our policies require detailed written model
documentation for significant models to assist in making their
use transparent and understood by users, independent
reviewers, and regulatory and auditing bodies. The
documentation must include details on the data and methods
used to develop each model, assumptions utilized within the
model, an assessment of model performance and a description
of model limitations and circumstances in which a model
should not be relied upon.
Our modeling methods and data are reviewed by independent
model reviewers not involved in the development of the model
to identify possible errors or areas where the soundness of the
model could be in question. Issues identified by the
independent reviewer are tracked and reported using our
existing governance structure until the issue has been fully
remediated.
It is important that models operate in a controlled environment
where access to code or the ability to make changes is limited
to those who are authorized to do so. Additionally, proper
back-up and recovery mechanisms are needed for the ongoing
functioning of models. Our use of independent model control
reviewers aids in the evaluation of the existing control
mechanisms to help ensure that controls are appropriate and
are functioning properly.
The PNC Financial Services Group, Inc. – Form 10-K 85