FRM Glossary · Part II · Current Issues

Model Risk

The risk of adverse consequences from decisions based on incorrect or misused model outputs.

In more detail

Model risk management per SR 11-7 / ECB TRIM covers development, validation, implementation, and ongoing monitoring. Failures include the 2012 JPMorgan 'London Whale' (a VaR model mis-specified for a new product) and the LTCM blow-up (over-reliance on historical correlations).