Model Risk is the potential for financial loss or adverse consequences arising from errors in financial models used for decision-making, valuation, or risk assessment. This risk can stem from issues such as incorrect assumptions, poor model design, data inaccuracies, or failure to validate models appropriately. Model risk is particularly relevant in areas like credit risk assessment, pricing of financial instruments, and risk management. Effective management involves rigorous model validation, regular updates and reviews, ensuring transparency in model assumptions, and using multiple models to compare outcomes and reduce reliance on any single approach.

Basel scope:

• Pillar 2

Capital requirements:

Mitigated by Capital

Related Links:

•       Basel Framework