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Improving efficiency — the third core element of robust Model Risk Management

10 December 2024

5 minute read

Process efficiency and cost planning are not new concepts to financial services organisations. All departments should be targeting efficiency while maintaining cost control, and Model Risk Management (MRM) is no exception.

The problem is, with an expanding scope driven by regulation, MRM compliance can easily result in inefficiencies.

To add value in MRM you need appropriate data, systems, processes and people — all of which can easily become out of date or ineffective. It’s critical that Model Risk Management efficiency remains front and centre as processes keep pace with new regulations, and that the right person is empowered to do the right job using processes they understand and systems they can access.

We’ve already spoken about the three core elements every bank needs to get right if they want to manage model risks successfully, including establishing a positive model risk culture and keeping pace through controlled innovation.

In this blog, we’ll discuss the third of those elements: introducing efficiencies to work faster, better and smarter.

And remember, for more in-depth insights, you can always download our specialist Model Risk Management Guide. Learn more about the guide from this link, or read it straight away by clicking here.

Why Model Risk Management efficiency matters

When managed correctly, an embedded model risk framework brings an additional level of value to your business, helping to facilitate informed and appropriate decision making. This could include streamlined governance processes, confidence in instant customer decisions, insightful board risk appetite reports or a fully automated Internal Capital Adequacy Assessment Process (ICAAP).

In other words, MRM is a source of strategic advantage when done right. It gives stakeholders across the organisation the appropriate level of understanding they need to use, interpret, challenge and ultimately harness the model landscape.

Inefficiencies make it harder to generate that advantage. They distract your people with systems, data and processes that are cumbersome and time-consuming, leaving them with less resources to transform the outputs into valuable insights. Here are just a few examples that can lead to inefficiencies within MRM:

Trying to fit a statistical model-based validation framework to a deterministic transaction monitoring third party rule-based model.
An inventory which can only be edited by one resource with no associated database.
A manual and disconnected ICAAP process.

These kinds of limitations can all fester and crystallise into material risks. It’s important that the model risk lifecycle is adaptable, reacting to and embracing regulatory change while growing hand in hand with controlled, innovative frameworks.

Improving Model Risk Management efficiency can be broken down into three simple steps: working faster, working better, and working smarter.

#1 Working faster with innovation

Investing in controlled innovation is one of the clearest ways that you can improve Model Risk Management efficiency, because it allows you to empower your people and benefit from relevant and effective processes and systems.

There are many different ways to innovate within MRM, but it doesn’t always have to be complex. Often, it can be a simple change, like challenging who does what to ensure the right people perform each task with no duplication of effort. Similarly, it could be challenging the how, to ensure that the processes and standards are relevant to the broadening model risk landscape.

But the changes can also be more complex, such as investing in new technologies and tools to support your people and processes. For example, implementing tools to automate repeatable tasks will both speed up the process of producing outputs while providing additional time for review and interpretation.

These may be marginal gains, but they can have a significant impact as the number of models in your organisation continues to grow.

#2 Working better with planning

It sounds obvious, but effective planning can be the defining factor in successful MRM.

The key is to start with the end in mind. Different regulators have individual interpretations of the rules, and different views of what successful MRM should entail; if you aren’t aware of these expectations, then your models will be more susceptible to compliance gaps at any point within the model risk lifecycle.

Therefore, it’s essential that you take the time to understand this upfront. Otherwise, it can lead to (for example) multiple remediation runs resulting from critical issues identified by model stakeholders — often a costly and unnecessary use of resource time that delays business critical projects.

So, ask yourself: how can I better plan our time and resources to produce the best output first time? What do I need this model for? What’s my outcome? What is the relevant local regulatory interpretation? How many people do I need?

As we’ve said before, a stronger MRM culture — where everyone in your organisation is more aware of the end-to-end model risk lifecycle — will help enormously. That way, you can avoid agreeing to unrealistic submission dates and putting undue pressure on your team. Remember… pressure leads to mistakes, which leads to remediations, which means less efficiency, more costs, and less value.

#3 Working smarter by outsourcing surge demand

Outsourcing is a prominent trend within MRM, and in recent months demand for validation resource has been increasing. Looking externally for expertise to service surge demand is often more cost-effective because it allows you to use resource when needed rather than bringing those individuals into your business full-time. It also means you can flex resource levels in response to changing validation demand.

Validation is a crucial aspect of MRM, requiring validators who possess a combination of curiosity, critical thinking, and strong interpersonal skills. However, sourcing and retaining this talent can be challenging, especially in an increasingly competitive market. Partnering with a specialist consultancy to provide surge demand gives you access to this specialist skillset as and when you need it.

Another key advantage of outsourcing to a specialist consultancy is the deep understanding of industry standards they bring. True specialists not only perform validations but also help refine standards and frameworks, elevating them to best in class. That means you can deliver these essential services more effectively and cost-efficiently, adding strategic value beyond the immediate requirements.

It’s also worth pointing out that surge demand is particularly effective in newer areas where validations have only just begun to be mandated by regulation — such as compliance and fraud. That way, you can complete important reviews with experts who, given demand, might not be required on a full-time basis.

How can 4most help improve your Model Risk Management efficiency?

There are several ways that 4most can support you. Firstly, our team includes a number of specialist validators who can perform any urgent activities you may require, as well as project managers who can help streamline the overall process.

Our experts can also advise senior management teams on how to improve efficiencies across their organisation. And, finally, we host numerous roundtables throughout the year, where representatives from different banks across the globe can share their challenges, insights and advice in an anonymous format.