The global credit crunch that began in 2007 threw the financial industry into turmoil and highlighted the need for financial firms to improve their risk management practices. Today, the credit crisis is far from over. Markets remain volatile, and financial firms face waves of regulatory requirements intended to safeguard the solvency of individual firms and the stability of economies worldwide. These reforms will dramatically affect firms — burdening the profitability and growth of some, and the very survival of others.
Banks have been using credit scoring models for over five decades, so managing the life cycle of models is nothing new. Most have had some kind of process in place to ensure the models they develop are robust, validated and monitored from a performance perspective and that decision makers have confidence in them. In recent times, however - partly in response to the credit crisis in 2008 - the discipline of model risk management (MRM) has become more formalized and rigorous, driving the need for enterprise-level model information management systems. The regulatory scrutiny being applied to them is intensifying and spreading globally, with US and European regulators leading the charge. For example, whereas regulators were previously more interested in the numbers they were provided, now more regulators want to have a core understanding of the models banks used to generate these numbers.