Model Validation & Model Risk
Comprehensive guide to model risk management, validation frameworks, and governance
Model Validation & Model Risk
Executive Summary
Financial institutions rely extensively on quantitative models for pricing, risk measurement, capital calculation, and strategic decision-making. Model risk—the potential for adverse consequences from decisions based on incorrect or misused model outputs—has emerged as a significant risk category requiring dedicated management attention. Regulatory guidance including SR 11-7 in the United States establishes expectations for model risk management programs. For practitioners in risk and quants, validation and governance are core; for consultants advising on model risk, SR 11-7, or validation frameworks, the ability to explain lifecycle and governance in clear terms supports credible delivery and value for money. This manual provides comprehensive coverage of model validation methodologies, governance frameworks, and ongoing model risk management.