Model risk managers grapple with interconnectedness

US regulators ask banks to assess cross-dependencies of models – prompting some to employ network theory

Interconnected
“No-one knows in the industry how to assess [model] interconnectedness” – State Street's Julia Litvinova

US regulators are asking banks to assess the way their risk models interact and depend on one another, prompting some of them to employ network theory analyses to assess whether increased interconnectedness also leads to heightened model risk.

Julia Litvinova, head of model validation and analytics at State Street, said the bank received feedback from regulators following a recent supervisory review, asking it to assess model interconnectedness.

This proved to be easier said than done, however