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Banks are highly dependent on credit, market and behavioral models. These are used for a wide variety of purposes across nearly all functions in a bank and have become a key component of operational efficiency and risk management. Banks use models to evaluate risks, assess capital adequacy, define funding requirements, understand customer behavior, manage data analytics and make investment decisions.

Indeed, the use - and importance - of models is only set to grow as the rapidly proliferating trend of digitalization and the incorporation of artificial intelligence, machine learning and big data increases the number and complexity of models even more. The correct use of sophisticated models is key to making the right decisions for the future.

The imperative for banks to effectively manage and monitor their Model Risk Management (MRM) activities is only growing; therefore, MRM has become a matter of strategic importance.

Against this backdrop, KPMG member firms have conducted a survey of significant banks to assess the MRM landscape, which includes answers to the following fundamental questions.

  • What are the key challenges facing banks?
  • Are the regulatory requirements and guidelines clear and understood?
  • Where do banks' efforts need to be focused to strengthen and improve their MRM further?

Survey results demonstrate that while a great majority of banks have a systematic MRM framework in place, to ensure the emerging and increasing challenges of model risk are under control, most banks have more work ahead of them.

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