How can you apply lessons learned to help your models weather future turbulence?
The COVID-19 pandemic was a stark wake-up call. Model risk officers and managers can take proactive steps before the next shockwave arrives.
Recent economic disruptions exposed weaknesses in many models once considered largely reliable. Fire drills erupted at many banks and credit unions, including the following scenarios:
- Current expected credit loss model owners scrambled to adjust estimates when model limitations were identified and output didn’t align to expectations.
- Many fraud models produced a higher volume of false positives as customer behaviors drastically changed during the pandemic.
- Price and credit stresses triggered overreactions in many risk models.
Volatility will happen again, and you can better prepare your risk models.
No risk management team wants to face unexpected challenges. That’s why every experience should be viewed as a lesson in understanding the limitations of the organization’s models and enhancing practices to mitigate model risk.
Laying the groundwork now can provide an advantage when another disruption strikes.
