Model Risk Management

Model Risk Management

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.

The Importance of Addressing Model Risk

Our 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.

How Sahoo Global Can Help

Sahoo Global provides a full spectrum of services to financial service industry and insurance clients through value-added capabilities needed to support business strategies and continuously improve operational performance while effectively managing risk. Our practice includes specialists in specific risks and processes that are important to the financial services industry. 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. We also validate AML transaction monitoring systems and Fraud models. Our independent, holistic validation process helps control model risk, prevents losses associated with model risk and enhances key stakeholders’ understanding of models. We also help organizations manage their portfolio of model risks by assessing, designing and implementing model governance programs.

We can develop customized quantitative models, refine and calibrate existing models, and design stress testing and scenario analysis programs to supplement existing analytics. Our model risk experts can help with the following:

• Quantitative models provide useful information for management decisions and offer increased efficiency.
• Financial institutions rely on models to synthesize large amounts of complex data into a more simplified format for management’s evaluation and analysis.
• Models help management in decision making, allocation of capital, and to monitor risks across a broad range of activities.
• Use of models exposes organizations to model risk and creates the need for effective model governance.
• Financial accounting standards are increasingly requiring reporting based on values derived through use of models.