Purpose and Objectives
The purpose of model risk management is to anticipate and manage the ways that a model inaccurately reflects the reality that is intending to model,
thereby creating an inaccurate measurement.
Risk Identification
As part of the model development process, the model engineer in conjunction with the model owner shall indentify all assumptions on which the model is built,
and document those assumptions as part of the model risk document, including the anticipated ways in which those assumptions may
be violated.
When a risk is identified, the risk will be added to the model risk document
with two risk classifications, the likelihood that the risk materializes
- Improbable
- Possible
- Probable
as well as the size of of the impact
- Immaterial
- Moderate
- Severe
Risk Monitoring and Reporting
When a model has risks that are not improbable, or if improbable has severe impacts, the risk engineer shall include in the model risk
document a plan for monitoring and reporting the risks during the model lifetime.