Banks warned off machine learning for model risk

Banks acknowledge they “cannot hide behind a complex tool” to assess interconnectedness

US regulators are raising concerns about the use of machine learning techniques to assess contagion risks in bank model networks.

Last year, certain entities supervised by the US Federal Reserve were asked to analyse their aggregate model risk – essentially the interactions and dependencies between various risk and pricing models. Banks responded by experimenting with advanced computational techniques to understand model interconnectedness, including machine learning, network theory and probabi