Model risk management vital for banking innovation

Ensuring effective decision-making and addressing new challenges like climate risk through robust model risk management.

With banking sectors, particularly in regions like Indonesia, facing limitations in capital access and growth due to restricted banking access, the focus has turned towards innovative solutions to overcome these hurdles. 

Adisorn Hatairatana, Head of Consumer Credit Risk Model Management & Technology at Bank of Ayudhya, highlighted the increasing importance of model risk management, which provides the necessary quality assurance for banks to ensure that their decision-making processes are both effective and reliable.

"Model risk management is very important right now for banks," he stated, emphasising that it ensures models are working effectively and identifies when they are not. This creates a necessary dialogue between model specialists and business users, fostering an understanding of when and how to use these models correctly.

He also said that despite its importance, model risk management is a relatively new function within financial risk management, presenting its own set of challenges. 

"Climate risk is new," Hatairatana remarked, adding that it requires a methodological approach and expertise that banks might not immediately possess. He pointed out the necessity for banks to consider these new demands carefully, as well as the general public's perception of climate risk outcomes, which may not always align with empirical evidence.

Hatairatana further emphasised the importance of thorough processes and discussions for model validators to ensure fair and accurate model outcomes. He said that this approach to model validation is essential, especially as banks navigate the climate risk and its impact on traditional banking practices.

When asked about presenting climate risk stress test results to stakeholders, Hatairatana stressed the importance of understanding and practicality in communication. "The communication would be much easier, and the business decision-making would be intuitive," he explained. 

He advocated for banks to carefully vet model frameworks and methodological approaches that align with their business processes, ensuring that novel concepts are not selected without proper consideration of their applicability and limitations.