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By Chris Smigielski, Model Risk Director, Arvest Bank
What are some examples of actions an organization can take to maintain model risk programs in a stress environment?
Maintaining the integrity of model risk programs during a stress environment depends greatly on the foundations of the program and what preparation has been done before a stressful event occurs. A complete and up-to-date model inventory is the key foundational element for MRM programs because without it, you do not know where to look or what you are looking for. Timely model validation and continuous model monitoring over the model lifecycle verify models are fit for use because over that lifecycle there will inevitably be periods of stress or blips in variables and data.
Some activities that may help maintain model integrity in a stress environment are sensitivity testing and benchmarking models. This can include use of challenger models and benchmarking to accepted industry, segment, or peer group averages to evaluate whether model overlays and adjustments are justifiable and by how much. Another (and perhaps taken for granted) model expertise is obviously first line model management. The model owners have the usage history and business knowledge about the use of the model and when results are outside of normal ranges, it should trigger immediate investigation to the cause(s) which may include examination for data issues, input errors, or if legitimate, a model overlay.