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By Ayan Mukherjee, Senior Product Owner, VP, Model Validation, ING Bank
Models are imperfect reflections of reality; they generate model risk which cannot be eliminated, but can be made transparent to the organisation and managed. Model risk is the risk that the financial or reputational position of a financial institution is negatively impacted because of the use of models. Process of identification, assessment, control (acceptance or mitigation) and monitoring of the risks caused by the use of models is done through Model Risk Management (MoRM). The main aim is to identify, manage and mitigate model risk by ensuring the right level of MoRM control mechanisms per model class. This can be achieved through:
The risk appetite of the bank is constantly evolving. Regulatory models in IRB, IFRS, Economic Capital space are still at the epicentre of the Risk Appetite but there are evolving trends and increasing interest on Know Your Customer, Loan Pricing, Fraud and Analytics models. Cyber and Climate risk are also important topics to look forward to in the near future.
MoRM is all about dealing with unexpected circumstances, Covid being a prime example and how prepared are we as an organization for these situations. Some key areas where MoRM should focus on in future are as under:
Some of the challenges are as under:
There is definitely scope for automation in future. Some processes within model development and validation can and should be automated for effective and efficient model lifecycle. Also, model inventory should be maintained in more sophisticated tools which can then generate automated dashboards for reporting on model risk to the senior management. However, overall model governance will still require human in the loop and that is something which will and should never be obsolete.
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