The impact of the global pandemic on banking business operations has uncovered some unexpected flaws in the models that institutions rely on to operate their businesses.
Models which typically rely upon historical data to operate successfully are no longer fit for purpose and, in their scramble to find a way forward, many banks put in place quick fix solutions that created more issues than they solved.
Banks now need to put in place a much more coherent model risk management strategy, taking a two-stage approach. In the short term, they need to address the immediate issues, using a crisis response plan. In the longer term, they must create a model risk management framework which is both more resilient and more flexible to enable it to adapt more effectively to rapidly changing risks.
This article was originally published on McKinsey.com on May 5, 2020, and is reprinted here by permission.