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Model Risk Management
A Southeast Asia Perspective
There is currently no substantive guidance with respect to Model Risk Management in the SEA region, which creates the opportunity for the SEA market to define and advance industry practices ahead of regulations.
Zero tolerance of model risk akin to operational risk is neither achievable (due to complexity) nor desirable (from cost-efficiency perspective). Rather, model risk appetite needs to be calibrated and the exposure managed to a risk-efficient level similar to market and credit risk. Governance of models throughout their lifecycle and internal risk ratings become key.
Acknowledging and embedding MRM into the organisation as part of the daily operations and management decision-making allows banks to break the perspective of it being limited to a compliance exercise. Advanced use of data and analytics can further aid derivatives of internal risk ratings and self-improvement of models, and have a positive impact on profitability.
The unique features of the SEA region and its institutions calls for bespoke and custom approaches to MRM. Tested knowledge and expertise from American and European markets can be tailored to best fit the region and the risk profile of the respective bank. Simply mirroring a western model has its limitations; a careful balance between costs and control must be struck to best fit local and regional perspectives and culture.