Journal of Risk Model Validation

A practical maturity assessment method for model risk management in banks

Liesl van Biljon and L.J. Haasbroek

  • We provide a practical approach to advance the mitigation of model risk in banks.
  • Emerging best practices regarding model risk management (MRM) is summarised.
  • Our method informs the current MRM maturity level and can be used to determine a target maturity level.

We motivate and propose a qualitative method to assess the maturity of model risk management practices within banks. This method is aligned with relevant regulatory guidance and observed leading practice. It provides banks with a practical way to determine their current maturity levels with respect to model risk management practices and define a targeted level of maturity. It also makes clear what aspects need to be remedied to progress from the current state to the targeted maturity state. Therefore, the results of the application of this proposal provide a lucid view of the current state of a bank’s model risk management practices as well as what needs to be improved to further mitigate model risk at a targeted maturity state.

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