Model Risk and the Great Financial Crisis: The Rise of Modern Model Risk Management

Wharton Financial Institutions Center Working Paper No. 15-01

12 Pages Posted: 30 Jan 2015

Date Written: January 7, 2015

Abstract

We trace the development of model risk management in U.S. banking against the backdrop of the growing importance of complex financial models in banks, the recognition of model risk, the emergence of model validation as a response to model risk, and the contribution of failures in model risk management to the Great Financial Crisis. We recognize that while substantial progress has been made in the management of model risk, the challenges have grown, including the increasing reliance by the regulators on models.

Keywords: commercial banks, risk management, systemic risk

JEL Classification: G12, G21

Suggested Citation

Brown, Jeffrey and McGourty, Brad and Schuermann, Til, Model Risk and the Great Financial Crisis: The Rise of Modern Model Risk Management (January 7, 2015). Wharton Financial Institutions Center Working Paper No. 15-01. Available at SSRN: https://ssrn.com/abstract=2557213 or http://dx.doi.org/10.2139/ssrn.2557213

Jeffrey Brown

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Brad McGourty

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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