What Is Model Risk? A Complete Introduction for Banking Professionals
2 December 2025·13 min
Watch on YouTubeAbout this video
Model risk now sits at the centre of modern banking. In this first session of the Model Risk Management in Banking course, we break down exactly what model risk is, why it matters, and how regulators and financial institutions across the world are reshaping their expectations.
Models drive almost every decision a bank makes. Credit approvals, stress testing, trading, pricing, customer behaviour, fraud detection, regulatory capital, ESG reporting every one of these relies on models. But with growing complexity comes growing risk. When a model is flawed, misused, or misunderstood, the consequences can include financial losses, compliance breaches, misaligned decisions, reputational damage, or systemic impacts.
This lesson introduces you to the foundations of model risk management. You will understand how model risk arises, why it has become one of the most important forms of non financial risk, and how banks structure their governance to ensure models are safe, reliable, and well controlled. We explore the lessons learned from the 2008 financial crisis, how global regulators responded, and why model oversight has become a board level priority.
📌 What You Will Learn in This Session
• What model risk really means
Understand how flawed design, incorrect use, bad data, weak assumptions, and misunderstood outputs create risk in banking.
• Why model risk has grown so rapidly
Explore how modern banking became model driven across credit, market, liquidity, capital, compliance, fraud, and operations.
• How the 2008 crisis changed the role of models
Learn why regulatory confidence in models collapsed and how that shaped today’s model risk expectations.
• Core components of a model risk management framework
Inventory management, validation, governance structures, monitoring, documentation, and model risk appetite.
• How global regulators approach model risk
Discover what PRA SS1/23 requires in the UK and how this compares with the ECB, EBA, Federal Reserve SR 11 7, MAS, and Middle East regulatory developments.
• How model risk is reshaping banks internally
Understand why banks are investing in new governance teams, validation functions, technology, and model oversight capability.
🎯 Who This Video Is For
Model developers
Model validators
Risk and compliance professionals
Internal auditors
Senior leaders responsible for governance and decision making
Anyone seeking to understand how models shape modern banking
📚 Continue your model risk learning journey with The Industry Portal
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🔍 Keywords
model risk, model risk management, MRM banking, PRA SS1 23, SR 11 7, ECB TRIM, model governance, model validation, financial risk, banking regulation, capital models, AI model risk, risk management training, the industry portal
model risk managementmodel riskbanking modelsfinancial modelsPRA SS1 23SR 11 7ECB TRIMmodel governancemodel validationmodel lifecycleregulatory compliancerisk management
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