Model Risk Management

Model Risk Management

Responding to the challenges presented by COVID-19

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The COVID-19 pandemic has significantly affected financial markets in the first quarter of 2020. Stock markets have moved sharply and volatility has increased. Bond yields and rates have reached record lows and credit-default-swap indices have been surging, reflecting concerns of increased corporate default risk. This has led to wide-ranging impacts on risk model outputs that are used for risk-weighted asset computations as well as for capital and financial reporting.

Risk models that were developed in a pre-COVID-19 macroeconomic landscape may not have responded well to current market dynamics, which puts pressure on those responsible for managing and validating these models. In this paper, we set out key impacts on various risk model clusters and argue for an urgent refocus on model risk management.

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