Model Risk Management

From Open Risk Manual


Model Risk Management denotes the techniques, practices or behaviours that aim to identify, measure and mitigate Model Risk, the potential of Model Error or wrongful Model Usage. For organizations relying heavily on quantitative models for decision making and operations, model risk management would form an important component of Model Governance.

In analogy with more general Risk Management frameworks, model risk management relies on the three pillars of

  • Model Risk Identification
  • Model Risk Measurement
  • Model Risk Mitigation

In current practice these distinct aspects of model risk management are not implemented separately, by typically as part of the responsibility of the Model Validation function.

Issues and Challenges

  • Model Risk Management is a very young discipline. While elements of model risk management have been practised by best practice organizations many aspects remain poorly define and (where available) are driven by regulatory requirements focusing on minimum standards