Model risk represents the potential that a financial institution may experience adverse consequences based on a decision reached by using a model. It may originate due to fundamental model errors or due to incorrect or inappropriate use of an otherwise sound model. An organization’s exposure to model risk varies given its unique mix of business activities and level of model usage. Greater complexity and broader use indicate higher risk.
Management and boards of directors understand the value – and limitations – of their models so they can make confident business decisions, advance business strategies and achieve regulatory compliance.
Models are simplified and idealized representations of the real world and are prone to errors in some cases. Further, because models are driven by assumptions and finite data inputs and then interpreted by people, model risk is inescapable. The use and reliance on quantitative models creates the need to consider the degree to which model risks are understood, monitored and managed. Regulators mandate model validation under such pronouncements as OCC 2011-12/FRB SR 11-7 and comparable regulatory guidance. Other stakeholders, such as auditors, investors and rating agencies, are also demanding improved governance over the ever-expanding inventory of quantitative models.
Protiviti provides a full spectrum of services to clients through value-added capabilities needed to support business strategies and continuously improve operational performance while effectively managing risk. Working together, the people, processes, technologies and knowledge sharing we provide help our clients improve their operations to face the future with confidence.
Our Model Risk team brings Ph.D.-level “quant” experience to developing and validating all types of quantitative models, including asset-liability management, credit risk, economic capital, market risk, pricing and operational risk models. Our model risk experts can help your organization: