Intrinsic Model Risk is a challenge with every risk system. The more complex the model, the higher the potential model risk.
Extrinsic Model Risk, caused by input data errors and model configuration mistakes, can compound model risk significantly and cause severe distortions to risk optics.
Model Risk Mitigation
By minimizing Extrinsic Model Risk, Red Swan improves the veracity and confidence of risk reporting.
Ongoing Challenge of Model Risk Management
Maintaining optimal performance requires constant vigilance and responsiveness to prevent excessive model risk from creeping back into reports.
Red Swan services provide ongoing maintenance, monitoring, diagnostics, and timely mitigation required to manage model risk effectively.
The Hidden Danger Of Model Risk
Risk management is an inherently unstable process due to continuous changes and growing complexity.
Portfolio holdings, models, market data, technology, reporting requirements, and risk personnel regularly change through the course of business. This creates an ongoing maintenance challenge to keep the risk processes up-to-date and performing optimally.
Without proper attention, modeling errors and mistakes can compound, distorting optics to the point where risk output is no longer trusted by risk and portfolio managers, investors, or regulators.
This type of Model Risk catches many firms by surprise because they are not aware how severe it can be until it is a very serious and costly problem.
Example Timeline of Model Risk Errors and Corrections
Risk report accuracy declines regularly in the course of business: Input/output data errors, model configuration, formatting, & validation errors all contribute to the degradation of risk reporting trustworthiness.
- Input/output data management and process automation
- Model configuration, formatting, and validation
- Ongoing monitoring, diagnostics, analysis and remediation
- Version control, documentation and audit support