Getting Model Risk Management Right
Good model stewardship demands policies, sound data, education, documentation, and follow-through
Risk management is part of the daily routine of a banker—after all, banks are in the business of taking risk. As part of banks' financial and operational risk assessment and decision-making processes, they need timely and relevant information to inform the evaluation of potential risks and their relative impact.
To facilitate this process, practitioners use a combination of data, models, and business judgment. Combined, these help paint an overall picture and inform everyday decisions.
Bad data or bad models lead to poor decision-making. But how do we know the data or models that we rely upon are accurate and reliable? And who bears this responsibility?
The answer: We all do!
1) Model Risk Management and the Three Lines of Defense
From the 2011 regulatory guidance on model risk management emerged the practice of the "three lines of defense:"