Industry Survey Highlights Roadmap to MRM Success
Another sign that Model Risk Management (MRM) is moving from niche topic to mainstream concern was the recent publication of the first EMEA Model Risk Management Survey from Deloitte.
Based on research carried out in late 2020 and early 2021, and featuring responses from small, medium, and large institutions, the survey highlights how far institutions have come in recent years to enhance their MRM.
It also indicates the gaps many institutions still need to fill to achieve best practice MRM, a view that chimes with Mitratech’s own experience in this area.
The research explores the ever-growing scale and complexity of MRM, as the largest institutions ramp up their MRM systems and processes, while their smaller peers get to grips with MRM fundamentals, possibly for the first time.
There are common themes that all institutions share. More models are now considered ‘in scope’ for MRM, as they have become increasingly central to key business processes, such as investment decision making, client loan approvals, risk management, business management, or product development, just to name a few examples.
In parallel, regulators are building on MRM regulations like the US’s SR 11-7 and the UK’s SS3/18, and now apply requirements around enhanced operational resilience and a greater focus on non-financial risks, especially operational risk. This places MRM firmly in the scope of enterprise risk at Board level.
The biggest challenge for MRM teams
The survey highlights the need to balance the scaling up of MRM, with limited corporate resources, skills, and budget, and the need for transparency and auditability. Resolving this will be the biggest challenge facing modeling teams, and their management, in the coming few years.
The survey also delves into how the largest institutions are leading the way to embedding MRM at the core of enterprise risk management. Several have split the way they manage model risk by creating a dual management structure, featuring both a Strategic Model Risk Committee and an Operational Model Risk Committee.
As their titles suggest, their remits vary, with strategic committees typically defining model risk policies and model risk appetite, which needs to align with their institution’s strategic risk profile. Operational committees are more involved in monitoring the use, the management, and the validation of models against policy and the needs of the business. Both committees require different types and levels of reporting, but reports for both need to be consistent, accurate, and delivered from the same ‘golden source’.
The applications and best practices being used?
Applications used to manage MRM feature significantly in the survey. The largest institutions use dedicated vendor applications, while medium-sized, and smaller institutions often make use of Excel spreadsheets or SharePoint, or even go entirely without any methods or tools. The survey suggests that there are plans amongst many of these institutions to enhance their MRM, in response to industry pressures.
Another area explored? The extent to which best practice MRM had been implemented, focusing on the need for fully integrated model inventory management, document management, model lifecycle management, and workflow, as well as reporting and analytics.
The results suggest that the value of a core model inventory is widely accepted as the foundation of MRM. This will serve firms well as they deal with the business problems highlighted earlier. However, at the same time, they offer ample evidence for the need to integrate lifecycle management, workflow automation, document management reporting, and analytics, which will be essential to fully support strategic and operational model risk committees, risk management, compliance, and auditors.
Companies will be delivering these capabilities in one way or another already, but in ways that are likely to be slow, inaccurate, and costly, and which will soon be impractical.
There are more (and better) MRM delivery options than ever
Both the research, and Mitratech’s own experience talking with customers, suggest that the need to deliver fully integrated MRM is fast becoming irresistible.
The good news for modeling teams and their management are their options for delivering MRM have never been greater. While the options for delivering legacy MRM solutions remain relevant for some, more flexible, template-led options that can deliver results very cost-effectively are also available to institutions looking to adopt and enhance their MRM.
Providers (like Mitratech) now offer powerful capabilities that help to deliver best practice MRM, covering inventory management, document management, workflow, reporting and compliance management, as well as spreadsheet risk management. Proven and robust, the best of these are use with a wide range of financial institutions across the world. They’re crucial tools for motoring forward on that roadmap toward MRM success.