COVID-19 has amplified the scope and use of model risk management based on advanced analytics

Authors

Moving model risk management to the next level-1

The importance of MRM was already growing before the COVID-19 crisis. In response to rising levels of risk and the need for more sophisticated modeling, financial institutions began to develop AI–ML models for financial and nonfinancial risks alike. The crisis has accelerated digital transformations in the financial sector, which has been an important driver of the new generation of models.

Now is the right moment to transform MRM. The function’s strategic importance has increased. Across the organization, the scope of models is expanding; many of the new models are designed around advanced analytics. The level of MRM work is rising commensurately, calling for greater MRM efficiency. Financial institutions need a less validation-centric function, one that can strategically prioritize the redevelopment and adjustment of models. A more comprehensive MRM approach, beyond validation, will help ensure a model life cycle better suited to AI and ML models.

This article was originally published on McKinsey.com on March 31, 2021, and is reprinted here by permission.