The views and opinions expressed in this article are those of the thought leaders as individuals, and are not attributed to CeFPro or any particular organization.
By Liming Brotcke, Senior Director, Head of Model Validation, Ally
What is the importance of establishing a strong risk culture to aid the development and deploying of models?
Model risk occured during the development and deployment phases is caused by fundamental errors in comparison to model risk as a result of incorrect and inappropriate model use. A strong risk culture should cover both types of model risk during the entire model life cycle. A model can be implemented in the presence of statiscal weaknesses and performance deficiencies as long as such flaws and their impact are clearly identified and assessed, with mitigating controls in placer.
To do so, a strong risk culture must be established at the financial institution with equal recognition and execution from both the first and the second lines of defense. Model risk can assist the development and deployment of models to reduce fundamental errors in two phases. Prior and during the development and implantation, model risk can set up clear expectations by pointing to model developer, user and owner existing governing documents that are applicable for model development and implementation activities and documentation. During model validation, model risk will provide continued education to ensure alignment to expectations. Both aim to assist the business line to establish a robust, transparent and repeatble model development and deployment process over time.
