What is model risk management (MRM)?

While originally viewed as a sub-domain of operational risk, it has evolved and is increasingly considered as a risk category on its own. Similarly, model risk management (MRM) has evolved as a clearly defined discipline over the last decade, fueled by spikes of regulatory intervention in the aftermath of the 2008-2009 financial crisis.

What does a model risk officer do?

Some companies, such as banks, employ a model risk officer to establish a financial model risk management program aimed at reducing the likelihood of the bank suffering financial losses due to model risk issues. Components of the program include establishing model governance and policies.

What should a model risk policy include?

No matter if the governance is central or local, there should be a model risk policy regulating the definition of model risk, scope of model risk management, roles and responsibilities, model inventory, model approval and change process, model validation and management of model weaknesses. Furthermore, it is important to involve senior management.