The development process must support the construction of the most appropriate models in order to meet the objectives assigned to these models.
3.3.2
The development process must be structured with sequential logical steps that take into consideration multiple factors, including but not limited to, the business and economic context, the data available, the development techniques, the implementation options and the future usage. Consequently, institutions are expected to employ judgement and critical thinking in the execution of this process, rather than run it in a mechanistic fashion.
3.3.3
Model development requires human judgement at each step of the process to ensure that the assumptions, design and data meet the objective of the model. Judgement is also required to ensure that development methodology is adequate, given the data available. Therefore, institutions must identify where judgment is needed in the development process. Suitable governance must be implemented to support a balanced and controlled usage of human judgement.
3.3.4
Each of these components must be regarded as an essential part to complete the whole process because each step involves key modelling decisions that can materially impact the model outcome and the financial decisions that follow. The process must be iterative. This means that if one step is not satisfactory, some prior steps must be repeated.
3.3.5
The development process must incorporate a degree of conservatism to mitigate Model Risk. Any material degree of uncertainty associated with the development steps, in particular related to data, must be compensated by conservative choices. For instance, conservatism can be reflected during the model selection process or by the usage of buffers at any point during the development process. However, conservatism should not be employed to hide defects and deprioritise remediation. When conservatism is applied, institutions must justify the reasons for it, identify the uncertainty being addressed and define the conditions for model improvement.
3.3.6
The choice of methodology for model development must be the result of a concerted structured process. This choice should be made upon comparing several options derived from common industry practice and/or relevant academic literature. Methodologies must be consistent across the organisation, transparent and manageable.
3.3.7
Institutions must pay particular attention to the model selection process for all types of models. When several models are available, institutions must put in place a documented process to select a model amongst several available options.
3.3.8
The pre-implementation validation must be considered an integral part of the development process. This step must ensure that the model is consistent, fit for purpose and generates results that can be explained and support decision-making appropriately. The depth of the pre-implementation validation should be defined based on model materiality.