The Road to Better Model Risk Management

As the financial sector faces the most treacherous risk climate in more than a decade, financial firms are reevaluating their model risk management (MRM) practices – and not a moment too soon. Errors and lax MRM practices have been implicated in a number of high-profile banking failures over the years, including the 2007-2008 global financial crisis.

As financial institutions deploy ever-more varied and sophisticated models in their quest to meet consumers’ evolving expectations, they find their MRM responsibilities spiraling in complexity. In fact, nearly one-third of firms (28%) are already running more than 100 models, according to research by PwC.

It goes without saying that firms need the right level of oversight and governance to adhere to the latest regulations. Unlike many financial regulatory standards, the U.S. has led the way on MRM, with the SR 11-7 guidance setting the bar for improved governance and control requirements for the design and execution of MRM. It also cemented the status of model risk alongside more established risk types, such as credit risk.

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