Blame the Process, Not the Person: Enhancing Model Risk Management in Banks

“Don’t blame the person, blame the process.” I always remember hearing this said by the leader of the first analytics team I worked for in the late 1990s. Looking back now, this manager was instilling better model risk management before the discipline had been defined. Errors, mistakes and oversights can happen throughout the model lifecycle stages, but with strong process can be reduced and minimised. Ultimately this is the backbone of better Model Risk Management (MRM) practices.

“All models are wrong, but some are useful” is a quote attributed to statistician George Box in the late 1970s. He was acknowledging that models are always simplifications of the real world but can be useful nonetheless. Regardless of complexity, all models are prone to certain uncertainties, limitations, and errors (all model risks) that may impact the firm's operations, financial stability, and reputation. MRM refers to the process of identifying, assessing, and mitigating risks associated with the use of mathematical models in decision-making, regulatory calculations and other business operations.

I’ll be talking more about MRM best practices at the upcoming Credit Scoring and Control conference from 30 Aug – 1 Sept at the University of Edinburgh. I will expand on are how technology solutions can help organisations quickly and easily implement and adopt better processes and systems. Paragon’s Focus solution is one such example.

Four key areas that MRM technology solutions address are:

Centralised Model Inventory

All models are identified, easily loaded, managed and reported meaning that nothing can be forgotten about or fall through the cracks.

Automated Workflows for Model Lifecycle Stages

All steps of a process are completed (often across disparate teams ) because an automated workflow is used to control and manage the process. For example, in the model development process data is extracted, data is checked, model design is formulated…, through to the model being finalised and validated. An automated workflow not only ensures that each step is carried out in the correct order, but that the necessary checks and sign-offs are performed and recorded along the way.

Steps are not missed or forgotten because automated emails and reminders can be set-up.

Centralised Documentation Repository

Documents relating to all models can be stored, managed and easily retrieved with the necessary permissions, controls and versioning. This means there is always a ‘single version of the truth’ and a complete audit trail of what has been done, when, by who and why.

Dashboards and Reporting

Having up to date dashboards tailored to audiences provides complete transparency across the organisation, so that all models and associated actions are managed appropriately. All teams across development, validation, audit and senior management can easily see what they need to see driving efficiencies, collaboration, prioritisation and workload planning.

This is just a brief overview of some MRM best practices. To learn more about our Focus model risk management solution please click here or come to Edinburgh at the end of August!