Large Bank Examination Workshop February 2026

Regulatory Guidance

1) Joint Interagency Advisory on Interest Rate Risk Management (January 6, 2010)

“ Institutions that use vendor-supplied models are not required to test the mechanics and mathematics of the measurement model. However, the vendor should provide documentation showing a credible independent third party has performed such a function. ”

This Vendor Model Certification satisfies the above documentation requirement.

“ Validation practices could include constructing an identical model to test assumptions and outcomes or using an existing, well- validated “benchmark” model, which is often a less costly alternative. The benchmark model should have theoretical underpinnings, methodologies, and inputs that are as close as possible to those used in the model being validated. ” While the universe of bank-permissible transactions could not be evaluated within the scope of any vendor model certification, Angel Oak conducted extensive testing on a broad sample of transactions that are commonly found at depository financial institutions. Both the cash flows and valuations of the sample transactions were estimated using a proprietary benchmark model developed by Angel Oak. This benchmark model has been extensively field-tested on previous validations of specific risk model implementations and is based on commonly accepted methodologies that are broadly similar to those incorporated into the THC Model. The variances between the results of the THC Model and the benchmark model were well within reasonable tolerance parameters. “ Economic value-based methodologies measure the degree to which the economic values of an institution ’ s positions change under different interest rate scenarios. The economic-value approach focuses on a longer-term time horizon, captures all future cash flows expected from existing assets and liabilities, and is more effective in considering embedded options in a typical institution ’ s portfolio. ” The Model has both advanced Monte Carlo stochastic simulation capabilities as well as a proprietary variance reduction methodology that efficiently evaluates the embedded optionality of a variety of typical banking products. These capabilities were tested during the certification process to ensure that optionality was reflected in the economic value of equity calculations generated by the Model.

2) Supervisory Guidance on Model Risk Management (Federal Reserve Supervisory Bulletin 2011-7 and OCC Bulletin 2011-12)

“ Banks should require the vendor to provide developmental evidence explaining the product components, design, and intended use, to determine whether the model is appropriate for the bank’s products, exposures, and risks. ” The scope of this validation included a review of the methodology approach documentation developed by THC as well as academic research that was independently conducted on the core Ho-Lee term structure model as well as the prepayment and core deposit behavioral models utilized by THC. The end user documentation was also reviewed and found to be satisfactory.

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