MODEL AND MODEL RISK MANAGEMENT – A Key Discipline in Digitally Driven Banking

Models Provide Predictive Power – But Also Carry the Risk of Misguided Decisions. Model Risk Management Must Be Structured, Transparent, and Independent.

In an era of increasing reliance on quantitative methods and algorithm-based decision-making, banks employ a wide range of models – from credit scoring and provisioning, to market and liquidity risk assessments, ICAAP calculations, stress testing, and business planning. Therefore, robust model risk management is essential to ensure the integrity, consistency, and reliability of decision-making processes.

Model Risk Management (MRM) encompasses the structures, processes, and controls that ensure models are properly developed, implemented, monitored, and periodically reviewed – while minimizing the risks of inaccurate outputs and suboptimal decisions.

Our services include:

• Design or enhancement of the bank’s model risk management framework, aligned with regulatory expectations and best practices.
• Development of model risk policies and risk assessment methodologies, including model classification schemes, materiality matrices, and validation procedures.
• Support in establishing a comprehensive Model Inventory, clearly documenting the purpose, scope, methodology, ownership, and lifecycle status of each model.
• Model risk assessment through the development of MRM indicators, maintenance of the inventory, and identification of potential flaws or faulty assumptions.
• Independent model validation, covering technical and business dimensions, including performance testing (e.g., back-testing, benchmarking, stability analysis).
• Training and empowerment of key functions (risk management, internal audit, business units) to identify, monitor, and manage model risk effectively.
• Integration of MRM into ICAAP, stress testing, IFRS 9 provisioning, and other relevant areas across the bank.

Why is this important for your bank?

A poorly calibrated or misused model can lead to bad credit decisions, inaccurate provisioning, insufficient capital, and damaged credibility. Supervisors increasingly expect banks to implement a comprehensive approach to model risk – not only technically, but also from a governance perspective. A professionally managed MRM framework enhances transparency, accountability, and the bank’s resilience against failures in the analytical foundations of its business.