Model risk is the risk of incurring negative financial or reputation effects as a result of making incorrect business decisions on the basis of the models operating within the Bank.
The objective of models management and model risk management is to mitigate the level of model risk in the Group.
Within the Group, model risk is managed both on the part of a given company (an owner of a model) and at the level of the Bank. In
December 2013, a new department - one of whose tasks is to ensure greater standardisation and integration of management methods of model risk within the Group - was appointed by a resolution of the Management Board.
61.1. Identification and assessment of model risk
Identification of model risk in the Bank mainly consists of:
- gathering information on all existing, built and planned to be build models,
- cyclical determining the relevance of models,
- determining potential threats that may occur during the life cycle of the model.
All models relevant to the Bank are covered by the regular independent validation process.
The model risk evaluation is aimed at determining the scale of threats associated with the occurrence of the model risk. Assessment of the risk level of particular elements important from the model’s point of view, risk assessment on the level of a single model and aggregate assessment of the model risk level is carried out in the Bank.
Ratings may be aggregated mainly at the level of the Bank, particular risk types or classes of models, particular processes of model life-cycle. The model risk assessment is performed at least once a year and at the moment of appearing of new models, change the scale or business profile of the Bank.
61.2. Model risk monitoring
The purpose of model risk monitoring is to control model risk and diagnose areas for management actions. Model risk monitoring process contains, in particular: the level of model risk, the status of implementation of the proposed recommendations and the effectiveness of implementation of the recommendations on mitigation of model risk.
61.3. Model risk reporting
Model risk reporting is conducted in the Bank on a quarterly and annual basis. Reports contain, in particular:
- results of model risk monitoring,
- information on the level of model risk and model risk map,
- potential proposed management actions reducing the model risk,
- evaluation of effectiveness of the recommendations made to reduce the model risk level,
- conclusions, reports or summaries resulting from the model management process.
61.4. Management actions concerning model risk
The purpose of management actions is to form a model risk management process and a level of this risk in the Bank.
Management actions in particular consist of:
- issuing internal regulations,
- determining acceptable levels of risk,
- issuing recommendations,
- making decisions about the use of tools supporting model risk management.