Summary
Expert judgement is used across risk models — in scenario design, overlays, low-default portfolios, and stress. Treating it as an unavoidable weakness misses the point; treating it as ungoverned is the actual weakness.
Where judgement is used
Common locations include PD assignment in low-default portfolios, stress scenario severity, behavioural assumption setting, and post-model overlays.
Making judgement auditable
Each judgement should be recorded with the reasoning, the range considered, the evidence weighed and the decision-maker. A one-line note is not documentation.
Consistency
Judgements on comparable questions should be consistent across time and across assessors. Calibration exercises and second-line review support consistency.
Challenge
Independent challenge — from validation, audit, or a designated challenge function — is the primary control. Where challenge produces material adjustments, the frequency of judgement review should increase.
Aggregation
Individually reasonable judgements can compound into materially aggressive or conservative aggregate positions. Portfolio-level review of judgement impact is essential.
Limitations
Judgement cannot be eliminated in areas where data is thin. It can be governed so that its role is transparent and its impact bounded.
Related expertise
See Model Risk and Validation.
Current compliance reading
About the author
Jonas Adam Mohamed Osman Abdelghafour is a Chief Risk Officer, Risk & Compliance Director and governance expert advising banks, insurers and regulated firms. See the professional profile, about and qualifications.
Frequently asked questions
Where judgement is used?
Common locations include PD assignment in low-default portfolios, stress scenario severity, behavioural assumption setting, and post-model overlays.
What should risk leaders know about making judgement auditable?
Each judgement should be recorded with the reasoning, the range considered, the evidence weighed and the decision-maker. A one-line note is not documentation.
What should risk leaders know about consistency?
Judgements on comparable questions should be consistent across time and across assessors. Calibration exercises and second-line review support consistency.
What should risk leaders know about challenge?
Independent challenge — from validation, audit, or a designated challenge function — is the primary control. Where challenge produces material adjustments, the frequency of judgement review should increase.
What should risk leaders know about aggregation?
Individually reasonable judgements can compound into materially aggressive or conservative aggregate positions. Portfolio-level review of judgement impact is essential.