German Banks Fall Short on Model Risk Management, KPMG Warns
The Importance of Robust Model Risk Management in Financial Institutions
In a stark reminder of the significance of robust model risk management (MRM), financial institutions in Germany are being warned that inadequate practices and standards are leaving them vulnerable to substantial losses and reputational damage.
A Critical Component of Good Governance: Model Risk Management
As banks continue to navigate increasingly complex market conditions and macroeconomic trends, experts at KPMG Germany emphasize that a good MRM framework has never been more crucial. However, despite the growing awareness of its importance, many institutions are struggling to implement effective measures due to the complexity and dependencies involved.
The Consequences of Poor Model Risk Management
“Model risk is real, and the consequences of poorly calibrated or unsuitable models can be far-reaching,” warns Haie Lawrenz, Senior Manager at KPMG Germany and member of the Global Model Risk Working Group. “Some financial institutions have already suffered significant financial losses and reputational damage due to inadequate practices and standards in relation to model development and use.”
Key Components of a Good MRM Framework
According to Lawrenz, good model governance is a critical aspect of MRM, regulating:
- Regular checks
- Model design
- Model development
- Handling of model changes
- The application of models
However, many institutions are failing to prioritize this area, leaving themselves exposed to risks.
KPMG Germany’s MRM Market Practices
To address this issue, KPMG Germany has developed MRM market practices that enable both regulatory compliance and good business risk management. These practices provide a comprehensive guide for banks seeking to strengthen their MRM capabilities and mitigate potential risks.
Downloadable Guide: “Increasing Challenges for Model Risk Management (MRM) within Financial Institutions”
KPMG’s English-language publication outlines the key steps to building an effective and efficient MRM framework in financial institutions. The document is available for download, providing a valuable resource for banks seeking to improve their MRM practices.
A Call to Action: Prioritize Effective Model Risk Management
As Germany’s financial institutions navigate increasingly complex market conditions, they would do well to heed KPMG’s warning and prioritize effective MRM frameworks to avoid the pitfalls of inadequate model risk management.