SAS: The Future of Model Risk Management for Financial Services Firms
Posted: 1 September 2016 | Source: SAS
Banks have been using credit scoring models for over five decades, so managing the life cycle of models is nothing new. Most have had some kind of process in place to ensure the models they develop are robust, validated and monitored from a performance perspective and that decision makers have confidence in them.
In recent times, however − partly in response to the credit crisis in 2008 − the discipline of model risk management (MRM) has become more formalized and rigorous, driving the need for enterprise-level model information management systems. The regulatory scrutiny being applied to them is intensifying and spreading globally, with US and European regulators leading the charge. For example, whereas regulators were previously more interested in the numbers they were provided, now more regulators want to have a core understanding of the models banks used to generate these number
To this end, regulators now expect organizations to:
• Identify, estimate, monitor and manage model risk.
• Support effective challenger and independent reviews.
• Employ robust internal controls and effective governance.
• Set up and maintain a model inventory.
• Integrate model risk limits with risk appetite.
• Create a comprehensive and sustainable MRM program.