In models we trust
Models are increasingly being used in every aspect of our day to day lives. In the current COVID-19 environment statistical and mathematical models are literally everyday news, given the key role of the Irish Epidemiological Modelling Advisory Group in supporting and advising the Chief Medical Officer and the National Public Health Emergency Team, which in turn advise the Government in its response to the COVID-19 pandemic.
Financial institutions use models across a number of disciplines including business planning, calculation of regulatory capital requirements, calculations of provisions, pricing, liquidity modelling, risk management etc. Such models are currently subject to increased scrutiny given the need for real time analysis in the COVID-19 environment, in order to support key business decisions and enquiries from and reporting to regulators. Furthermore, any models utilising a proxy based approach may face additional reliability challenges of proxy based approaches as traditional rules of thumb breakdown under stressed conditions. The increasing reliance on models requires a sound model governance and model risk management framework, not only for financial reporting and key business decisions but also to ensure compliance with supervisory requirements.
Benefits of having a model risk framework include:
- Robust governance framework and a standardised process to be able to manage model risk.
- Creation of an inventory that includes all the entity’s models, taking into account their materiality / importance.
- Identification of all risks associated with data, methodology, implementation, and use of models.
- Model risk assessment and quantification of its impact on key metrics such as profitability, operational risk etc.
- Standardised reporting, risk register, and controls which mitigate the risks.
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For further information, contact our team below - we'd be delighted to hear from you.