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Three reasons your organisation needs model risk management

Financial institutions rely on their models for critical operations. Employees depend on models for daily tasks – from loan processing to credit risk evaluation. When so much rides on financial models, organisations must ensure these models work properly. Model failure leads to inaccurate results and large financial losses. Banks and asset managers have realised the importance of ensuring optimal functionality of their models and look for reliable model risk management technology solutions. In this digital era, banks and asset managers should move beyond outdated model risk management solutions and adopt model risk management strategies.

  1. Better decision making with model risk management

Models are used for making a number of decisions in the financial sector. For example, a bank may use a risk model to determine the creditworthiness of borrowers before disbursing loans. It may use a financial model to project annual return on investment. Each model performs a specific task. A model producing erroneous results would lead to wrong decisions being made, and bank employees may not even realise a model has started producing inaccurate results until it is too late.

Models are interrelated and help with a number of operations, and failure in one model could impact the other models use by an organisation. For example, a credit risk model could start approving all loan applications, even from defaulters. Model risk management is the only way financial institutions could avoid such instances.

  1. Performance monitoring in real time 

A financial institution must monitor the performance of models in real time. With outdated technology, banks can never monitor the performance of all models centrally. Banks use a wide range of models for their operations. Manual monitoring is not possible, but with model risk management technology solutions, they could measure the performance of models in real time. Model risk management solutions use a number of KPIs to measure the performance of models. Model risk management becomes easy when an organisation identifies shortcomings in real time.

  1. Documentation of models 
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Model risk management encompasses several tasks. One of them is documentation of the models used by an organisation. A bank should be aware of the models used by employees to make critical decisions, and model documentation could help find the root cause easily when an issue arises. Model updates, service issues, expiry dates and other information should be documented frequently.