We previously discussed Early Warning Systems in the context of black swan events, like the COVID-19 pandemic. With their near real-time capabilities, these systems are reliable allies in countering the negative fallout on financial institutions and their credit risk profiles. Incorporating Model Risk Management best practices into the Risk management of an FI is another effective method to manage and mitigate model risk and calibration risk. As valuation adjustment and managing the materiality of the risk drivers take precedence under the stress caused by unpredictable, potentially catastrophic events, the systematic approach and, technology-aided framework should enable the user and the FIs to effectively manage the risk over this time
After the tumultuous impact of COVID-19 on the global financial sector, countries are bracing up with exit plans that will not only help restore financial stability, but also allow them to be prepared for future black swan occurrences. Whether these collective efforts will buckle or thrive under pressure always remains to be seen. But, in the interim, there are several technology-led interventions that financial institutions can adopt to identify and mitigate model risk and calibration risk in the face of uncertainty.