The evolution of model risk management

By Ignacio Crespo, Pankaj Kumar, Peter Noteboom, and Marc Taymans. McKinsey&Company

An increasing reliance on models, regulatory challenges, and talent scarcity is driving banks toward a model risk management organization that is both more effective and value-centric.

The number of models is rising dramatically—10 to 25 percent annually at large institutions—as banks utilize models for an ever-widening scope of decision making. More complex models are being created with advanced-analytics techniques, such as machine learning, to achieve higher performance standards. A typical large bank can now expect the number of models included within its model risk management (MRM) framework to continue to increase substantially. >>