Since the global recession, regulators worldwide have become increasingly concerned about the soundness of decision making and capital adequacy within financial services. As a result, they are taking an even closer look at how financial institutions manage risk and use scoring models.
To address this greater regulatory scrutiny of model risk management, financial institutions face many challenges, among them:
- Clear guidance. While the Fed/OCC and Basel regulators have issued guidelines on what they expect, they are often just that—guidelines. The onus falls on financial institutions to develop a rigorous model management framework to satisfy audit requirements.
- More models. Predictive models are being used on an increasingly broader scale—often in the thousands for large lenders. This makes it difficult to manage and track models, and determine whether they are still performing well. It's also a struggle to provide required documentation and administration.
- Transparency. Models are growing in both number and complexity, but they must still be easy to understand, defend and explain. This is important in internal discussions, for regulatory reviews and when explaining to customers why, for instance, a loan was denied.
- Bandwidth. Much of the compliance burden falls to IT departments, who in these lean economic times, have had to cut back on staff and resources.
For evidence of the growing focus on model management and governance, check out a new white paper from IDC Financial Insights, "A Framework for Model Governance: Opinions and Insights from Bankers Across North America." In it, IDC shares findings from in-depth interviews with financial institutions across North America and Latin America. These institutions identified regulatory requirements as the number 1 driver behind their model management investments, however many continue to be challenged in establishing effective programs around model risk. IDC also defines the characteristics of model governance "laggards" versus "leaders," and shares several best practices for creating a strong model governance framework.I invite you to download the IDC report, and join us for a June 4 webinar where Mike Versace, Research Director at IDC Financial Insights, and FICO's own Sharon O'Connor Clarke will discuss findings.