How Model Risk Management Is Adapting to the COVID-19 Crisis

Public and regulatory attention to the impact of COVID-19 on banks has been rightly focused on credit quality. However, behind the scenes, many banking processes are being indirectly affected by disruptions such as resource constraints and re-prioritization as well as communication gaps. One of these processes is Model Risk Management (MRM). Through our conversations with MRM teams on model development and model validation, three “hot” topics arising from the COVID-19 crisis have surfaced.

Dashboards and transparency of team activities

Among banks with large distributed teams that handle hundreds of individual projects, there’s a real urgency to have simple tools that track what colleagues are working on, how long it’s taking them, and what the status of their projects’ workload and progress is. COVID-19 needs are more focused around ‘dashboards’ within each line of defence and less on workflows. However, this may change as the situation stabilises. The immediate benefit of dashboards is that they are an inexpensive solution that can be built remotely and implemented within a couple of months. Heads of development or validation teams can quickly have a much better picture of what is happening in their teams with minimal effort. Savings from easier oversight and more efficient use of the team means that the investment pays for itself many times over in the same year.

Risk process automation in MRM

Whether or not you agree with the quote “Model validation will be automated, or it simply will not be,” we are now seeing much more interest in automation in the RPA space. A number of tasks can be automated, including testing, generation of documentation content, and a large part of regular reviews. Automation can cut down on costs, which can help balance out the high costs of banks having in-house and senior quant teams. Automation lets the quant experts focus on judgement‑related tasks. We are seeing senior quant analysts showing a lot of excitement for RPA projects.

Open source

Across the financial services industry there is wide recognition that the benefits of open source are still only just scratching the surface of what is possible. There’s so much more that can be achieved by using curated, pre-approved sets of code. This opportunity could reduce licence costs, cut workload, and even improve turnaround times from development to production. Most banks we’re talking to are at least investigating this opportunity, and the proof of concept is usually quick, taking just 3-4 months to understand how the bank’s solution could work. While there are off-the-shelf products in this space, we’re seeing banks test and then decide against using them because these products are still underdeveloped, and there’s no guarantee that they will meet the bank’s stringent requirements for back-testing and robustness.

The COVID-19 crisis will not likely lead to any temporary easing of model risk management standards. In fact, the re-calibration of thousands of models to new economic realities places even higher demands on MRM. Hence, all three of these “hot” topics share a common denominator – efficiency, a theme that Evalueserve has been actively pursuing over the past year, as you can see in the blog article and case study that are linked below.

Four steps to make your model risk management 50% more efficient – blog article

Make your model validation 50% more efficient via automation & smart process design – case study


TALK TO AN EXPERT                        

Anna Slodka-Turner
Global Head, Risk and Quant Solutions Posts
Steve Lindo
Lecturer & Course Designer, MS in Enterprise Risk Management, Columbia University Posts

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