Model Risk Management: Challenges and Solutions

Following the fourth event of the Delta Capita Fintech series which looked at the landscape of Model Risk Management with Yields.io, George Petropoulos, Chief Product Officer and Ed Adcock, Principal


Following the fourth event of the Delta Capita Fintech series which looked at the landscape of Model Risk Management with Yields.io, George Petropoulos, Chief Product Officer and Ed Adcock, Principal Data Science Consultant outline their key takeaways from the event.

Over the past few years, significant time and effort has been dedicated into the management of model risk. Although Model Risk has always been present, its management has always deemed to be the responsibility of the second line of defence and more recently, that approach was scrutinised by Global Regulators. This approach has led to banks now seeing Model Risk as a key risk type much like Market Risk, therefore deserving its own management framework.

Designing and embedding framework in complex organisations such as banks requires a great deal of organisation, time and money and understandably comes with its challenges. On many occasions, the framework is driven by the operating model and not best practice often leading to inefficiencies and poor output.

Operating models and frameworks

Establishing the right operating model in conjunction with a framework driven by best practice is a transformative process for a risk type that has only come to the forefront in the last 10 years. The key enablers to an efficient process that manages model risk are technology and skilled personnel which focus on all aspects of the model lifecycle.

Sourcing skilled personnel has been challenging due to simultaneous high demand by banks and other financial institutions. This is a common issue when there is regulatory pressure to deliver on a roadmap that seems to be evolving depending on geographical location.

Methods for efficiency

Banks should seek to move to more efficient operating models that leverage strategic outsourcing partnerships. By doing so, they gain access to a new market for sourcing skilled resources whilst delivering on regulations and achieving long term sustainable cost savings.

Sourcing the correct technology also tends to be a challenge. There are numerous technology solutions in the market with the majority offering solutions focused on model inventory management and basic reporting. So far, these primary phase solutions where able to satisfy a key requirement of Banks having a common model inventory shared across the lines of defence.

Going forward, banks will have to move to different technology solutions that can deliver on the ever-increasing demands of model owners and model risk managers, as well as regulators. More specifically, banks should implement technology solutions that offer end-to-end capabilities around the model lifecycle such as:

  • Configurable Model Inventory
  • Automated Model Documentation
  • Automated Workflows
  • Customised Reporting
  • Model Performance Monitoring
  • Model Testing at Scale

What are the implications?

As the onus now moves to model owners to establish model monitoring across all their models and model risk managers to step up their effective challenge, technology and skilled personnel are key in achieving both goals. Banks are now challenged to make strategic decisions in both areas to achieve long term efficiency gains and manage their model risk dynamically according to their risk appetite statements.

How Delta Capita can help

Delta Capita in alliance with Yields.io offer a holistic end-to-end model risk management solution with features that standardise the model risk management process. The highly configurable workflow tooling and model inventory allows to orchestrate and scale model risk management activities. The platform enables model owners, model developers and model validators to collaborate and efficiently manage model risk.

Our personnel in Model Risk Management services support every part of the model lifecycle including Model Risk Management organisational design, Framework & Governance, Independent Model Validation, Model Implementation Testing and Model Development. To find out more, contact us here.