Bank Model Risks Incorporated into the Operational Risk Management Process

Abstract

The global economic and financial crisis substantiated the recognition that the mathematical and statistical models applied in the financial sector may lead to costly decision mistakes. The need for managing the risks associated with modelling also arises from the regulatory side. Since European regulations refer to modelling risks among operational risks, this article examines the process of evaluating and managing model risks and the possibility of integrating it into the operational risk management process. Based on practical experiences and the specificities of model risks, the basis of risk management in the case of model risks should be, instead of a capital cover, the formulation of a process replete with adequate controls. Moreover, a seamlessly functioning model risk management system can be designed within the process of operational risk management through the shared loss database, risk self-assessment and the definition of key risk indicators.