Managing Model Risk: Risk & Pricing Models

There is an increasing trend of banks and other financial institutions' to rely on the use of models and quantitative analysis techniques in their decision making. This is partly driven by regulation but also a result of enhanced data and technological capabilities.

The Federal Reserve guidance has highlighted the increased importance of model risk management in the US and raised the expected standards of validation and mitigation. Basel regulation has also encouraged growth in the use of quantitative models and with it, the management of the inherent risks. The level of regulatory direction provided for managing model risk is only likely to become stronger in the UK and Europe as financial activity is progressively becoming more automated based on the use of models and statistical algorithms.

‘The use of models inevitably presents model risk, which is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.'

Model risk can lead to financial loss, poor business and strategic decision making, or damage to one's reputation. Effective model risk management requires, robust model design from the outset, solid governance and an unfaltering validation process that will leave no stone unturned. Model validation is of paramount importance and involves a wide range of techniques that will be specific to the organization, market and product.

Risk magazine has designed a course that will breakdown Model risk management to its infant form to ensure a comprehensive understanding is gained from all that attend. Without correct use even a perfectly built model is worthless.

The first day of the course will cover the history, pricing, prudent valuation and validation and performance analysis of model risk management. The second day will cover the building blocks of a model risk management framework, model risk in market risk and credit risk and a session on governance and into the future.