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Partners in Risk & Capital Management

Model Risk Management

Adverse Consequences of Decisions Based on Models That Are Incorrect or Misused

Since its introduction with the first financial models, model risk has been integral to the financial industry, leading to the creation of sizeable teams dedicated to model validation across all major banks over the last few decades. The publication of SR11-7: Guidance on Model Risk Management by the Federal Reserve and OCC has brought renewed focus to the topic of model risk management.

Although an entire industry of compliance and best practices have emerged around the topic of model risk management, there is no “one-size-fits-all” solution. An effective approach must be tailored to each institution so that rather than simply being a compliance exercise, it adds value and reduces risk.

Our Approach

We support our clients through all stages of the model risk management process, from design of an effective framework, through to the development or enhancement of each critical component, to implementing a company-wide model risk management process. This includes:

  • Definition or enhancement of a model risk management framework
  • Formulation of a comprehensive model risk policy with all relevant appendices not only explaining “what” needs to be done but also spelling out “how” to do it
  • Specification and implementation of a central model repository
  • Definition of a detailed model risk management life-cycle including detailed specification of tasks for all stakeholder groups
  • Specification of all templates i.e. for model documentation, model validation or model performance reporting
  • Development of an enterprise-wide model risk management approach including monitoring, management and reporting

Our Experience

For more than 10 years we have been at the forefront of defining best practices in model risk management. We have worked with our clients in setting up their model risk management function, improving the way they operate and have supported them with actual validation work, including:

  • Re-design and development of a comprehensive set of model risk management policies and accompanying guidelines for a large US bank-insurance group
  • Development of model risk management policies and guidelines for a large German bank
  • Setting up a dedicated group-wide model risk management function for a large Swiss banking group
  • Development of model risk policies and validation guidelines for a large national bank
  • Review of SR11-7 model risk compliance for a complex Economic Capital system used globally for pricing and capital attribution within a large UK based banking group
  • Enhancement of model risk components and processes at various financial institutions
  • Development of Model Maps to understand fundamental components of complex models for large Swiss bank
  • Validation of models for various banks in different countries