Effective and efficient model risk management

Abstract

This paper considers the current challenges for banks to manage model risk, in the context of the triple pressures to reduce cost, to increase the quantity of models and model risk requirements, and to improve the quality of model risk management (MRM) activities. Despite the resource invested in the last decade, and the development of model risk as a risk discipline in its own right, there remain important dangers within MRM processes that can obscure or exacerbate the risk related to the use of models. We describe some of these dangers and the associated challenges to providing effective and efficient MRM. We also explore the steps that banks can take to improve MRM processes, moving from ‘standardisation’ to the ‘segmentation’ of MRM activities, allowing for a strategic deployment of cheaper off-shore resources and automation while retaining the all-important expert oversight.