Implementing A MRM Framework With KPMG
ClusterSeven and KPMG talk through a practical approach to building a model risk framework.
At a recent UK Finance Webinar, hosted by KPMG and ClusterSeven, there were some revealing insights into the current state of play of Model Risk Management (MRM) in the UK Banking sector. The webinar focused on the practicalities of implementing an MRM framework, which is becoming increasingly important in as SS3/18 becomes more embedded in standard business processes, and its relationship with SMCR becomes more apparent. The feedback from users attending the webinar suggests that the topic of MRM is firmly in the mind of the C-Suite. 44% of those who responded believed that their Board had a comprehensive understanding of Model Risk in their organization. The remaining 56% believed that their C-Suite had limited or no understanding of model risk, which reflects wider market feedback from KPMG and ClusterSeven, where enterprise MRM looks to be very much a work in progress for many institutions.
When discussing the practicalities of MRM, attendees were asked if they had a comprehensive Model Risk Policy currently. The picture was much more fragmented, 32% felt that their business’ model risk policy was well defined, another 37% believed their policy needed more detail to meet their needs. The remaining 31% believed that their MRM policy was either inadequate, or they had no visibility. This is a reasonable reflection of the work-in-progress nature of MRM, as institutions absorb the lessons and demands of SS3/18. While regulators recognize that institutions are enhancing their implementation of SS3/18, they also need to demonstrate progress over time.
Exploring the practicalities in more depth, the webinar discussed how to implement a comprehensive MRM framework, especially centered on the use of an inventory. Again the picture was fragmented about the best way to achieve this. While about a 7% of respondents used 3rd party vendor tools and 15% in-house developed toolsets, the vast majority – about two thirds were still using manual processes, supported by widely available desktop tools – typically Microsoft Office products like Excel. The remainder were unsure how their model inventory was managed. While manual processes are the clear preference in the early stages of enterprise MRM adoption, as required by SS3/18. We believe that the costs and risks associated with the manual approach will likely mandate the wider use of automated tools to deliver a transparent and cost effective MRM environment.
The webinar recording can be accessed here.