Industry Insights: Model Risk

This was an excellent talk – a more in depth topic than we normally cover, but personally I really learned something!

I was surprised at just how many risk models there were. I had always associated them with pricing risk, but there were models for market risk, credit risk, operational risk and decision making risk, as well as many other categories. Within each of these categories, there are several methodologies to choose from, each with advantages and disadvantages. It’s easy to see how just selecting the right model is challenge – before you even start to consider the assumptions you build into it or the quality of the data you input.

However, Srinivasan talked us through some of the measures you can use to validate your model and assess how accurate it is. He also walked us through the risk model “life-cycle” as it moves from the front office (where new securities offerings that need risk measures are developed for example) to the middle and back office (where ongoing monitoring takes place).

What was really interesting was that Srinivasan – despite being on the technical side developing and monitoring these models – was still very clear that at the end of the day it was people, and how they used the models, that really mattered. Fixing inaccurate models requires the right skill set, but it relatively simple if you have those skills. Preventing the mis-use of models by changing the risk culture is a people based task that is much more challenging! There are lessons about risk management and process here for all of us, whatever line of work we are in.

Next week we are hearing from a non-exec at Lloyd’s – so another high level speaker – who will be sharing his experience of observing key career turning points during his 20+ years in finance.

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Thanks

Dan