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.
All models relevant to the Bank are covered by the regular independent validation process. The result of the carried out validation is a report containing a description of activities performed during the validation, together with their results (i.a. the description of the identified gaps with the specified priority and recommended action to eliminate them) and assessment of model risk.
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.
The aim of management actions is to shape a model risk management process and a level of this risk in the Bank.
Management actions related to model risk in particular consist of:
- issuing internal regulations of the Bank,
- determining acceptable levels of risk,
- issuing recommendations,
- making decisions about the use of tools supporting model risk management.