Model risk management has nothistorically been a strategic priority for organizations but increasingregulatory requirement has become primary driver for banks to investconsiderable amount of time and efforts in mode risk management.
EffectiveModel risk management framework helps banks to deliver long-term businessbenefits regardless of the specific regulations that are enacted. Accordingto Chartis Survey on Model Risk Management, many firms are only interestedin meeting strict regulatory requirements for model risk. It also shows thatmany firms view model risk purely as a compliance-based cost, instead of as anopportunity to improve strategic goals.Changes in regulation havespurred some of the recent developments, particularly the U.S.
regulatorycapital rules for market, credit, and operational risk based on the frameworkdeveloped by the BCBS which is continuously increasing the number of modelsused across the organization. Hence, model inventories has become morecomplicated and widespread to ensure holistic view of all models which containscritical information of each model and how business is derived, validated andapplied. Model Inventory is a key to build a successful model risk governanceframeworkBuilding model inventory is keypart of the model risk management. A model inventory is a single repository ofmodels used across lines of business in the organization.
Banks should havecomplete inventory of all existing models, with an aim to facilitate model riskgovernance and management and to keep record of all uses, changes and approvalstatus of each model. Key aspects of model inventory is the accountability ofmodels means who is the ultimate responsible for controls, compliance andoversight of the models identified in the inventory. It is a synergistic view:looking everything in relation to the models from a single point of view. Automate model inventory using workflow engineWith the significant increasingnumber of models and growing demands to manage model risk governance frameworkeffectively, it’s time to adopt the right approach to build the robust modelinventory.
Managing and leveraging your model inventory to optimal effect meansfully understanding its complexity, as well as the various change processesthat will impact it.Using Effective automatedworkflow management, bank can maintain a robust model inventory and theworkflow automation have the ability to develop new workflows and enhance the workflowsas per organization’s requirement. It provides notifications and alerts foreach stage of the process to various stakeholders like Model Owner, Model RiskOfficer and Model Risk Management Team.Example: Automation of Model Risk GovernanceWorkflow processes Modules Description Sample Data Attributes Final Outcome Model Onboarding Add new model/potential model in the inventory with valid model status. Model Approval – Model approval initiates once model will be added in the inventory as per the current status of model. o Model Name o Model Intended Use o Model Status: Implemented, Under-development or Recently Retired o Model Purpose and products mapped with model assumptions o Model Limitations o Model Outputs o Restricted Usage o Model Owner Name o Developer Name o Date of Creation New Model with unique model ID Model Assessment Assessment of model implementation is used for giving rating/scoring to a model o Model Risk Rating/ Tier Rating o Model Risk Appetite o Residual Risk o Threshold Limit Model Risk rating Model Risk Incidents Model Validation Automatically system will trigger validation workflow as per next review and validation dates. o Last Validation Date o Next Validation Date o Validation Frequency o Validation Manager o Is Model Validated flag Model Validated – Yes/NO Validation Dates Validation Report Issue and Actions Effective Issue and Action workflow to resolve and close out issues as per criticality.
o Issue ID o Mapped to Model ID o Issue Desc Issue and Actions database linked with model Reporting Report will be generated in model inventory based on owner, functions, risk type, departments, risk criticality etc. o Dashboard View o Reports Dashboard view and report generated based on various parameters. All above processes are workflow enabled with adequatecontrols and documentation.
All change logs are maintained with properdocumentation and timestamp comments. Dashboard View of organization Risk Profile across all risk types