Model Risk Management

Many of the topics surrounding model risk management are based on the "Supervisory Guidance on Model Risk Management" which provide a good basis for regulatory expectations in this area.  The guidance can be grouped into three main categories which are:

  • Model Governance
  • Model Validation
  • Model Development, Implementation and Use

Model Governance

Implementing a robust model risk governance framework is essential to reduce the risk of monitoring failures and human error in financial crime systems which are intrinsically complex.  The six main areas to ensure a robust framework are:

  • Risk Committees
  • Roles and Responsibilities
  • Internal Audit
  • External Resources
  • Model Inventory
  • Documentation

Model Validation

Model validation is the process of verifying that the models are performing as expected and are satisfying the original business intent.  Model validation applies to both in-house and vendor models.

  • Model Fine Tuning and Calibration
  • Performance
  • Effective Challenge
  • Periodic Review
  • Vendor Product Assessment

Model Development, Implementation and Use

This is another core component of the model risk management framework because the quality of the implementation will effect the quality of the system's output.  Data quality issues, configuration errors and inadequate testing can lead to significant deficiencies in the model and ultimately reduces the usability and benefit to the end users.