Bank boards play active role in model risk management: KPMG

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50% of private and public sector banks agree that boards play an active role in management of model risks, a survey says.

According to the findings of the survey, which was recently conducted by KPMG in India, most banks agreed that model risk should be managed by a central unit. Private sector banks with over 50% of respondents are in favour of the board playing an active role while the remaining want it to play a pro-active role.

In case of public sector banks, a majority of 50% respondents felt that the board should play a pro-active role in tackling model risk while nearly 17% feel that the role of the board should be passive in nature.

30% of the respondents were from public sector banks and 53% private while the remaining 12% were foreign banks. Some 83% of PSBs preferred a fully centralised governance function.

In case of private lenders, 44.5% respondents were in favour of a centralised model. But a large percentage (33%) preferred a middle ground by way of a partially centralised model. Most of the private sector banks also seem to follow a phased approach to implement model risk management techniques.

For their public counterparts, this systematic approach is less apparent. “Model risk cannot be eliminated, only mitigated by good management. A combination of expert modelling and robust validation, while necessary, is not sufficient to eliminate model risk,” said Mritunjay Kapur, partner and head risk consulting, KPMG in India.

In terms of market risk models, just over 50% of private banks use proprietary models to compute prices of securities in the trading book. However, this is much higher than the mere 20% of PSBs that use models for this purpose.

“In a slow growth environment, banks that make efficient use of models/analytics are likely to grow at a higher rate,” said Naresh Makhijani, Partner and Head Financial Services, KPMG in India.

According to the findings, 96% of private sector respondents perform basic activities with regard to model risk management, but only 44% of them have adopted advanced measures to tackle the same. As for PSBs, 61% of the respondents said they have adopted basic measures while 39% went for advanced activities on model risk management.