How You Can Demystify Model Risk Management

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

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HOW YOU CAN DEMYSTIFYMODEL RISK MANAGEMENTA Banker’s Guide to Implementing a Model Risk Management Program


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COMMON START-UP CHALLENGES

“Getting Started” Challenges

Short timeline to define, staff, and operationalize a model risk

management capability.

Limited organizational understanding of the underlying

requirements and value proposition.

Policies and procedures that are not fully defined or

rolled out.


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COMMON MODEL RISK MANAGEMENT PROGRAM ISSUES

Execution gaps could add to the start-up challenges, for example:

Model risk expertise may not be internally available.

External relationships may not have been formed.

The bank has no assessment of individual model risk or aggregate model risk.

Limited understanding of roles and expectations: model group, governance groups, model owners, developers, and users.

Some independent model validations exist, but not to “new” standards.


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INITIAL FOCUS FOR THE MODEL RISK MANAGEMENT TEAM

1Build the model risk management policy, assessment approach, model validation plan, and schedule.

2 Communicate and educate on the Model Risk policy and expectations.

3Gain board and executive buy-in.


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5 EARLY ACTIONS

1Establish top-down support promoting managing model risk as “just good business.”

2Onboard credible and skilled staff and partners that balance influence and authority.

3Leverage a “burning platform” to demonstrate value and success.


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5 EARLY ACTIONS (CONT.)

4Position model risk management as an enabler of business strategy, not an obstacle, roadblock, or checklist item.

5Engage existing model experts in the governance process to promote ownership.


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OVERCOMING LEGACY ISSUESChallenges you will likely face:

Defining the “model” box and overcoming historical perception.

Dealing with existing deficiencies (e.g., documentation, validations, and understanding).

Working with model experts that never had someone “checking” them.

“Funding” the efforts required to catch-up on documentation, validations, etc.

Establishing an effective Model Validation Grading system (FYI - A,B,C,D has a history to overcome).

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IMPLEMENTING CHANGEChallenges you will likely face:

Providing effective challenge while building relationships.

Assessing standalone and aggregate enterprise model risk exposure.

Maintaining independence while striving to reduce model risk.

Establishing an active model change process to update risks and support planning/re-planning.

Allowing time to educate and improve model risk awareness.

Ensuring validation findings are addressed in a timely and complete manner.

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GET SUPPORT AND BUY-IN

With support and buy-in, the Model Risk Management team can focus on 1) the key success factors and 2) executing against the model validation plan and policy.


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KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM

1Establish a basic foundation and some fundamentals… but GET STARTED quickly.


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KEY SUCCESS FACTORS IN EXECUTING YOUR MODEL RISK MANAGEMENT PROGRAM (CONT.)

2Be practical and recognize that it will be a learning and iterative process.


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3Set a plan, run hard, communicate, and hold yourself accountable to the plan.


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4Establish an effective quality assurance process, especially if you are relying on external model validators.


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5Balance the focus on model development accountabilities, governance, and model validation efforts.


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6Quickly operationalize and leverage the model risk governance committee: expertise, buy-in, advocacy, communication, and distribution.


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Model Owners andDevelopers

Model Validation

Group

Model

Validation Plan

& S

cheduleOperational Risk Committee

Mod

el R

isk

Mgm

t Pol

icy

Model Documentation

Report Validation Findings, Remediation

Accountability

for Model R

isk

Board Risk Committee

Mod

el R

isk

Ass

essm

ent

Executive Risk Committee

Model Risk Management Process

ESTABLISHING A MODEL RISK GOVERNANCE STRUCTURE


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EFFECTIVE MODEL RISK PROGRAMS

To build an effective model risk management program for your bank, you should:

Allow time to educate and improve model risk awareness.

Provide effective challenge while building relationships throughout the organization.

Establish an active process to update risks and support planning/re-planning.


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INITIAL DEVELOPMENT PLAN• Create a reliable model inventory.1• Develop and approve model risk management policy

(through board).2• Establish model risk governance committee.3• Improve associate readiness: implement policies and

procedures; communicate to businesses. 4• Perform risk assessment process for all models in the

inventory.5• Prioritize models for validation.6• Develop risk-based model validation plan and schedule.7• Establish model validation group.8

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EXAMPLE OPERATING PLAN

Enhance model risk and validation

policies/procedures.

Formally refine model inventory

annually based on assessment.

Evaluate model validation staffing, competency, and funding plans.

Conduct model documentation

“catch-up” efforts with model/business

owners.

Refine model risk reporting including status, decisions,

risk levels/exposure, escalation, etc.

Expanded business owner and model

owner education and awareness.

Execute, monitor, and refine

established model validation plan

Operate, evaluate effectiveness, and refine model risk

management process.


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How You Can Demystify Model Risk Management

Economy & Finance