Model Risk and the Great Recession
Recent events in the financial services industry showcase key concepts about risk models, their assumptions, usefulness, and limitations. Statistical models for risk management are becoming increasingly commonplace as lending tools and achieving a level of influence requiring a commensurate level of oversight and suspicion. In fact, these models can contribute significantly to operational risk in financial services: Never before has reliance on models—for credit approval, risk ratings, capitalization, etc.—been so fundamental to the operating health of an industry.
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