Large Bank Examination Workshop February 2026

Vendor Model Certification: THC Decisions TM Model

Introduction

Financial institutions that rely on risk models developed by third party vendors are responsible for ensuring that the models they utilize are capable of serving their intended purpose. This requirement is driven both by clear regulatory mandates as well as the need to adhere to best practices in the adoption of risk management policies and procedures. One component of a financ ial institution’s initial and ongoing due diligence when selecting, implementing, and using a risk model must include obtaining an independent third party opinion regarding the model’s ability to serve its intended purpose. Thomas Ho & Co. (“THC”) is a financial engineering consultancy providing a number of products and services for a variety of firms, including depository financial institutions such as commercial banks. Among the products and services offered by THC is a balance sheet asset/liability management model that assesses the interest rate sensitivity of an institution’s economic capital and earnings. THC selected Angel Oak Advisory Services, an internationally recognized consultancy specializing in risk assessment and model validation, to certify the functionality of their THC Decisions model ( “the Model” ) as an outsourced interest rate risk assessment and management planning tool. The model was evaluated to provide assurance that it can fulfill its intended use to satisfy all relevant regulatory requirements addressing interest rate risk measurement as well as the client’s internal risk measurement, monitoring, and reporting needs. The M odel’s theoretical methodology, which is based in large part on the Ho-Lee term structure interest rate model, has been extensively evaluated by academicians and market practitioners since its original publication in 1986. The Ho-Lee model is one of a number of term structure models that are widely utilized in risk modeling and is particularly noted for its ability to forecast future interest rates as well as its use in pricing complex interest rate derivative transactions. The focus of this certification was therefore on the application of the underlying methodology to effectively evaluate the interest rate sensitivity of the cash flows and values of a broad sample of asset and liability transactions commonly found at depository financial institutions. The certification was conducted based on the best practices that have been observed and adhered to by Angel Oak Advisory Services in the previous conduct of risk model validations. In addition, the scope of review addressed the current (September 2011) regulatory requirements for third party vendor model validations. These requirements and the steps that were taken during the certification process to address these requirements are described in the following section. Certification Scope

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