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By Darius Grinvaldas, Head of Model Risk & Validation, Luminor Group
How does model validation fit into a holistic model risk discipline?
Model risk management as a holistic risk discipline is still undergoing a rapid evolution phase, especially since this evolution is a very evident phenomenon in smaller and more regional European financial institutions. Lessons that the industry very painfully learned from the last financial crisis triggered a strong and structured regulatory response towards model dependent risk management areas. The fundamental aspect of this regulatory response is the aim to articulate the need to understand model risk exposure on the overall enterprise level. This understanding requires a common and holistic view on general model risk management principles, definitions, roles, and responsibilities. By introducing the unified and holistically understood fundamentals like model definition, model life cycle stages and required minimum control environment throughout those stages, model risk function creates also a clear view and expectation which and what actual model validation activities have to be performed.