How do you assess and manage model risk in financial risk management processes?

Sample interview questions: How do you assess and manage model risk in financial risk management processes?

Sample answer:

Assessing Model Risk:

1. Identify Critical Models: Determine which models significantly impact risk assessments, decision-making, and reporting.
2. Review Model Assumptions: Scrutinize the assumptions underlying the models, ensuring their validity and applicability.
3. Assess Data Quality: Verify the accuracy, completeness, and representativeness of the data used in the models.
4. Conduct Sensitivity Analysis: Analyze how changes in model inputs affect outputs, identifying potential sources of risk.
5. Document Model Development and Validation: Create thorough documentation outlining the model development process, including assumptions, testing results, and validation procedures.

Managing Model Risk:

1. Establish a Model Risk Management Framework: Develop a comprehensive framework that outlines roles, responsibilities, and processes for managing model risk.
2. Implement Model Validation and Monitoring: Regularly validate models through independent reviews, backtesting, and stress testing. Monitor model performance and make adjustments as … Read full answer

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