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Risk

Model risk

The risk of loss from decisions based on models that are wrong or used incorrectly.

Models drive pricing, risk measurement, capital and lending decisions. Model risk is the danger that a model is built on flawed assumptions, poor data or coding errors, or that a sound model is applied outside the conditions it was designed for.

Banks manage it with a model risk framework: an inventory of models, independent validation, controls on use, and ongoing monitoring of performance.

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