As models becomes more embedded across every aspect of banks’ business operations, the drive towards an increasingly efficient and value-driven approach to Model Risk Management (MRM) is growing. 

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As model risk management evolves, so does its value

The number of models used by organizations is proliferating – our survey of leading banks found some had as many as 3,000 separate model in operation.

This dramatic rise in model usage demands greater efficiency from the MRM function to avoid model failure. The risks of model failure can have serious consequences – either in terms of financial losses or in fines imposed by regulators – or both.

But the value of a sophisticated MRM framework goes far beyond satisfying the regulators. It has a positive impact on a bank’s bottom line through reducing costs, avoiding losses and giving regulators more confidence in the bank’s processes, reducing their demand for add-ons and buffers.

Taking an evolutionary value-based approach to model risk management is the most effective way to harness the power of models and ensure optimum return on banks’ substantial investment in their models.

This article was originally published on McKinsey.com on February 10, 2017, and is reprinted here by permission.