Establishing Model Risk Management
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Reliance /Model
Usage
Intensity and Frequency of
Model Usage
3. Model Risk Management Goals
There are numerous factors that can contribute to increased model risk. These factors include
governance program dysfunction (e.g., process, control, reporting deficiencies), staff turnover,
regulatory pressure, market changes, and other external macro events. A strong MRM program
should support the company’s understanding of its model risk by defining key risk factors and
standardizing risk ratings. For example, a company might combine qualitative and judgmental
approaches to determine risk rating via a categorical approach, as noted below:
Figure 4: Risk Rating Categorical Approach
In practice, a risk-based assessment within the model inventory should align model
development and usage with risk management principles. By considering the model’s purpose
and usage and the consequence of misspecification or misuse, the company should improve its
understanding of model risk and be able to take the steps necessary to manage that risk to
tolerable levels. Even the simplest calculations have the potential to expose an organization to
significant risk. Thus, a well-defined MRM program should be applicable in most instances.
http://ccro.org © Copyright 2025, CCRO. All rights reserved. 10
Reliance /Model
Usage
Intensity and Frequency of
Model Usage
3. Model Risk Management Goals
There are numerous factors that can contribute to increased model risk. These factors include
governance program dysfunction (e.g., process, control, reporting deficiencies), staff turnover,
regulatory pressure, market changes, and other external macro events. A strong MRM program
should support the company’s understanding of its model risk by defining key risk factors and
standardizing risk ratings. For example, a company might combine qualitative and judgmental
approaches to determine risk rating via a categorical approach, as noted below:
Figure 4: Risk Rating Categorical Approach
In practice, a risk-based assessment within the model inventory should align model
development and usage with risk management principles. By considering the model’s purpose
and usage and the consequence of misspecification or misuse, the company should improve its
understanding of model risk and be able to take the steps necessary to manage that risk to
tolerable levels. Even the simplest calculations have the potential to expose an organization to
significant risk. Thus, a well-defined MRM program should be applicable in most instances.
