Sponsored by ?

This article was paid for by a contributing third party.More Information.

Model management frameworks: what lies ahead?

Sponsored by KPMG

Compass

Although the industry has a long history of model development and usage, the rapid improvement of model risk management (MRM) and its integration into larger model management frameworks is fairly new. To draw an analogy with technology lifecycles, let us consider the MRM operating models prior to 2011 to be version 1.0 (v1.0). These operating models introduced model validation and MRM practices in an intelligent way, but typically relied on a limited and somewhat experimental set of modelling approaches that were not particularly consistent across the industry, and heavily reliant on manual processes and controls. 

The joint issuance of SR 11-7 and OCC 2011-12 encouraged the formalisation of MRM practices beyond validation and paved the way for v2.0. Early in v2.0, banks responded to regulatory pressures by implementing enterprise-wide MRM programmes. Now, advanced-stage v2.1 operators are actively consolidating gains from regulatory-driven spend and focusing on improvement. This includes improving process efficiency, embracing automation, investigating advanced technologies, and solidifying an enterprise-wide understanding of both model risk and model usage. 

As banks progress through v2.x versions, many are exploring ways to update from ‘regulatory compliance’ to ‘compliance plus business performance’. Banks are evolving from MRM to a ‘more holistic model management approach’. These changes place us on the verge of v3.0 – a paradigm shift in operating models. 

From a strategic perspective, we can expect v3.0 to mirror traditional operating model cycles as practitioners transition from ‘effective’ to ‘embracing automation’ and ‘driving business value’. From a tactical perspective, early adopters are set to reap the benefits of unprecedented innovation in machine learning, natural language processing and other advances in cognitive analytics, all of which can yield gains in operating efficiency, cost reduction and competitive advantage. These improvements enable companies to run enterprise-wide scenarios daily, and rapidly develop holistic models. These capabilities transform MRM usage from compliance management to strategic and dynamic decision support tools. Whereas v1.0 created the concept and v2.0 refined it, v3.0 will enable firms to dynamically identify and drive value across the modelling and model development lifecycle. 

Perhaps the most important step in this journey will be to create a deep cultural awareness of models, their risk and their value to the organisation. A value-based model culture could create a platform for enterprise-wide efforts to recognise opportunities and build capabilities that support a v3.0 operating model. In this environment, organisations will identify and capture value from the process itself, systemically embrace new techniques and new technologies, and use model management as a platform to transform enterprise data into commercial advantage.

Early shifts towards v3.0 have been observed, but the end-state is still in development. These organisations are intentionally wrestling with the issues that will shape the future of their model management programmes:

  • Can we determine the value of our modelling and MRM functions, and can we appropriately transfer their value to internal users and external customers?
  • Can we use our modelling capabilities to shift our efficient frontier of intellectual property to more efficiently strike a balance between vendor models and internal builds?
  • Can we implement a process to keep us at the forefront of technology and modelling capabilities that applies equally to model development and MRM?
  • Can we identify our modelling ‘value stack’, determine the relative values of varying predictive capabilities across business units, and incorporate our internal ‘best-of-breed’ capabilities across commercial lines to help take ownership out of silos?
  • Can we use a combination of analytics and economic equilibrium theories to estimate the right time to leverage market-facing modelling capabilities to the benefit of our clients’ user experience?
  • Can we establish an infrastructure that ingests the entirety of our enterprise data, performs credible analytics and models its commercial implications?
  • Can we establish an approach to balance talent mix versus automation, and better understand the balance between internal judgement and speed?
  • Can we unlock the value of transparency by establishing a deep, cultural understanding of our modelling approaches from the front line to the executive suite?

As we approach a tipping point in the industry’s approach to modelling, model risk, modelling techniques and supporting technology, the notion can be both exciting and harrowing. With so much at stake, it is critically important to have both a credible vision and a credible partner in your MRM journey. KPMG is familiar with that role, having guided clients in their transitions from v1.0 and v2.0 to their current state. From operating model design, process development and model builds to technology strategy, infrastructure implementation and model governance, we play critical roles. We have also invested in and developed digital tools to help improve MRM operational quality while driving costs down. We welcome the opportunity to share our MRM perspectives and capabilities with you: please visit us at kpmg.com/us/model.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. ©2017 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

  • LinkedIn  
  • Save this article
  • Print this page  

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: