In the decade since US banking regulators published SR 11-7, model-risk management development has continued to evolve, challenged even more so by the COVID-19 pandemic. Six best practices may help banks to rebuild better after the crisis and avoid undesirable trade-offs between cost, timelines and quality.

Authors

The evolution of model-risk management_Six best practices for banks

As a result of the COVID-19 crisis, financial institutions find themselves with an array of models that need to be recalibrated or rebuilt and, subsequently, validated, monitored, and managed. The three lines of defense within an organization for model-risk management, including model-development ownership or sponsorship, risk validation and compliance, and auditing, are all facing tremendous pressure.

While the challenges associated with these dynamics are significant, they can be mitigated if banks apply the model-risk-management lessons that have been learned over the past ten years. In our view, that means targeting the best practices in six key areas: strategy, process enhancement, agile modeling, talent and culture, data architecture and infrastructure, and technology. If implemented to their potential, these six pillars may allow banks to rebuild better after the crisis and avoid undesirable trade-offs between cost, timelines, and quality.

This article was originally published on McKinsey.com on June 24, 2021, and is reprinted here by permission.