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Model risk management
Model risk management refers to the family of approaches designed to ensure a financial model is performing appropriately, while limiting the potential for model risk. Such activities aim to track and minimise a model’s limitations and estimate the possible impact of these on a company’s business activities. All model components – inputs, processing, outputs and reports – are covered across the entire development lifecycle, from build, to deployment (including the decision on whether a model is suitable to deploy) to maintenance.
Model validation is the independent affirmation that these processes are being adhered to. It is considered a separate activity from model development, and is typically conducted by staff who are not responsible for model development or use.