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In models we trust

Models are increasingly being used in every aspect of our day to day lives. In the current COVID-19 environment statistical and mathematical models are literally everyday news, given the key role of the Irish Epidemiological Modelling Advisory Group in supporting and advising the Chief Medical Officer and the National Public Health Emergency Team, which in turn advise the Government in its response to the COVID-19 pandemic.

Financial institutions use models across a number of disciplines including business planning, calculation of regulatory capital requirements, calculations of provisions, pricing, liquidity modelling, risk management etc. Such models are currently subject to increased scrutiny given the need for real time analysis in the COVID-19 environment, in order to support key business decisions and enquiries from and reporting to regulators. Furthermore, any models utilising a proxy based approach may face additional reliability challenges of proxy based approaches as traditional rules of thumb breakdown under stressed conditions. The increasing reliance on models requires a sound model governance and model risk management framework, not only for financial reporting and key business decisions but also to ensure compliance with supervisory requirements.

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