19SEPTEMBER 2024INSIGHTSCXORELEVANCE OF AN ADAPTABLE MODEL RISK MANAGEMENT FOR FINANCIAL INSTITUTIONS I am a physicist by background, earned my PhD in theoretical particle physics at City College of CUNY, and worked in academia for several years at various universities in the USA and Europe before switching to finance. I started my career in finance in 2021 (just before the September 11 event) as a rating analyst in the credit derivatives group of Moody's Investors Services. My work consisted of rating tranches of structured products with a variety of underlying portfolios, which included corporate and asset back securities, bank loans or tranches of CDOs (known as CDO squared), and other exotic derivatives or transactions, e.g., insurance CAT bonds or stand-alone companies. The work included reading lengthy contracts (Indentures) agreed between the issuing banks and the investors and translating these contracts (the deals) into Excel-based models, which were used to produce an evaluation of the creditworthiness of each deal (the rating).Every transaction was represented by a model. Information about the underlying portfolios, as well as assumptions and parameters, were inputs in the model calibrated to ensure that the output (rating) represented the current market conditions. Going through the mathematics of these deals allowed me to evaluate the risks vs. pricing, and I started wondering: `How do financial institutions make money?' Ratings reflected the quality of the deals, and they impacted pricing. As these deals increased between 2004 and 2006, they became more complex, with increased innovation in the portfolios and features, and they priced quickly and (usually) much more favorably for the issuing banks. Signs of the 2008 crisis appeared in early 2007. I moved to a new position in 2006 and was working in the risk management of a company that, among other things, managed and invested in structured products. I was managing numerous models of the company, including models that priced tranches of structured products and models that calculated risk and capital. The 2008 crisis was claimed to be due to a model. The Gaussian Copula, a simple, physically motivated model based on the normal distribution, had been adapted by Dr. David Li, an actuary By Rodanthy Tzani, Head of Model Risk Management, New York Life Insurance CompanyRodanthy Tzani
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