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Chartis Issues Report on Model Risk Management Solutions

 

14 July 2014

Chartis, the leading provider of research and analysis for the risk technology marketplace, announced today that it has released its Model Risk Management report for 2014.

“Model risk is the sleeping giant of risk management,” said Peyman Mestchian, Managing Partner at Chartis. “Everyone knows that the risk, pricing, and performance models that financial institutions rely on can fall prey to errors. All models can only be mathematical approximations of reality and therefore have only limited accuracy and reliability. As a result, firms are now looking for systems to manage the risks associated with their models.”

The report highlights a number of key trends and recommendations:

  • Increased regulatory requirements: Multiple regulators are making model risk management mandatory, including requirements under Solvency II, Basel 3, and Dodd-Frank. Additionally, regulators, including the OCC, Federal Reserve, and PRA are requiring firms to demonstrate evidence of controls and governance for models.
  • Stakeholder pressure: Shareholders and other stakeholders are demanding improved model risk management in response to losses caused by inaccurate or misused models. In particular, they are pressuring boards and senior management to take an increased role in model risk management.
  • Internal credibility: Errors in models are causing users to doubt their effectiveness and are creating a drive for improved model risk management within financial institutions.
  • Senior management involvement: Model risk management has not previously been seen as a strategic priority and has been implemented disparately with little or no aggregation. Senior management members need to lead enterprise-wide model risk management.
  • Mix of quantitative and qualitative risk management needed: Model risk management is difficult because it requires a mixture of quantitative (e.g. validation and stress testing) and qualitative measures (e.g. model use policies and governance), which should be used in combination with one another.
  •  End-to-end model risk management: To be effective, model risk management must encompass the full model development lifecycle and the full risk management lifecycle, from risk identification and assessment to risk control and monitoring.

The report uses Chartis’s RiskTech Quadrant™ to explain the structure of the market and the vendor landscape. The RiskTech Quadrant® uses a comprehensive methodology of in-depth independent research and a clear scoring system to explain which technology solutions meet an organization’s needs.