The increasing reliance on models, as well as the wider application of models, amplifies the need for an effective and efficient model risk management (MRM) function. The value of a sophisticated model risk management framework extends beyond regulatory requirements and should be used to improve an institution’s earnings through risk reduction, loss avoidance, cost savings, pricing, and capital management improvement.
A proper MRM helps ensure the development, validation, and implementation of high-quality models throughout an organization.
Recent market events confirm the consequences of model errors can be severe. Model risk materializes with defective models and model misuse and can cause an institution to make errors in reporting, pricing, hedging, and capital planning, among others. The implementation of new Current Expected Credit Loss (CECL) models, and the prominence of CECL calculated allowance for loan and lease losses (ALLLs) in the financials, has further increased the spotlight on MRM and heightened the need for timely model risk management.
Ankura’s model risk management team is poised to assist institutions to capture value through: