Co-Authors:

Carolina Biagini - Senior Quantitative Analyst - Kevin D. Oden & Associates

Amul Bhatia - Partner - Kevin D. Oden & Associates

Kevin Oden - CEO - Kevin D. Oden & Associates

It has been more than seven years since the publication of the Supervisory Guidance on Model Risk Management by the National Credit Union Administration (NCUA). In that time, progress has been slow and difficult for most Credit Unions (CU). However, as CU shift into automation, data-driven processes, and Artificial Intelligence (AI) to transform to digital banking, the number of models utilized will grow rapidly.  The use and complexity of models will continue to grow at all financial institutions. Moreover, the pace of expansion at CU will likely outpace their larger peers for the foreseeable future. This growth is partially due to the difference in initial baseline use of models for critical decision making and  it is also closely tied to the relative benefits models can provide to CU.

While these new technologies provide immense opportunity, they carry risk as well, which needs to be effectively managed to make the gains sustainable. For this reason, the NCUA adopted the Supervisory Guidance on Model Risk Management for all CU, requiring these institutions to bolster their MRM practices. 

Over the next few weeks, we will describe the key components of a sound model risk management program, with a focus on CU’s particular needs, as the struggles to develop a solid model risk oversight program are distinct from banks and other financial institutions.

Developing a sound, cost-efficient model risk management framework that is appropriately scaled for the institution is a key element of making the gains from increased model use sustainable.  It is important that CU start developing a strong risk culture, as well as they take time to build out an effective model risk management program with everyone at the institution understanding and fulfilling their role appropriately.

Week 1

Read more - https://culytics.com/blogs/week-1-mrm-a-practitioner-s-approach

• Model Governance (Roles and Responsibilities)/ Risk Committees/ Working Groups
• Model Risk Reporting/ Risk Appetite Statement  

Week 2

Read More - https://culytics.com/blogs/week-2-guide-to-identifying-and-maintaining-models

• Model Definitions
• Model Identification Process and Risk Ratings
• Model Inventory

Week 3

Read More - https://culytics.com/blogs/week-3-application-of-mrm-insights-to-sound-model-development-eff

• Model Development
• Model Reviews/Challenge (Validation, Targeted, Annual Reviews)
• Ongoing model monitoring and management