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Komfie Manalo, Opalesque Asia:

Financial institutions and regulators must develop standardized processes and technology for managing the risk associated with sophisticated financial models in the fund industry to lower the cost and potentially reduce systemic risk, according to a new report from Greenwich Associates.

The report, entitled Reducing the Risk of Using Financial Models, analyzes the techniques used by banks and other financial institutions to quantify and manage the risk associated with the use of increasingly complex financial models.

Model risk management became a priority for financial institutions in the wake of the global financial crisis. Guidelines from the U.S. Federal Reserve Bank spell out a general process financial institutions must use to develop, validate and monitor financial models. "The biggest model risk is the one you don’t know exists," says Kevin McPartland, head of market structure and technology research at Greenwich Associates.

However, the Fed guidelines provide only a limited description of requirements and do not provide a direct use of technology as part of the model risk management process—a remarkable omission given the technical nature of the risk being monitored.

Greenwich Associates has learned that financial institutions have developed robust processes that meet both the letter and the spirit of the rules. However, many of these processes are ......................

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