Principles and Practices of Model Risk Management (MRM),

Edition 1

Editors: By Charlie Lu and Peter Russo

Publication Date: 01 Jan 2027

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Principles and Practices of Model Risk Management (MRM) offers a thorough yet practical introduction to MRM, helping modern enterprises and financial engineers successfully navigate evolving, global markets. Initially developed within the financial industry, the advent of increasingly sophisticated computer models and AI have broadened the scope and necessity of model risk management. This textbook fills a critical gap by guiding readers in designing and implementing robust model risk frameworks across evolving scenarios and data landscapes. Authored by experts with extensive quantitative backgrounds and significant experience in model risk management within major banks, this book articulates modern MRM concepts and shares best practices from industry practitioners. Relevant for students of financial engineering, financial mathematics, and beyond, this essential resource is designed to benefit risk management professionals, financial analysts, regulatory compliance officers, and anyone involved in the development, validation, and oversight of financial models, providing them with the tools and understanding necessary to navigate and mitigate model risks effectively. Online hosted Jupyter notebooks offer various examples and datasets to put skills into practice across chapters. This book covers the regulatory background of model risk management across different jurisdictions, delves into the various types of model risk, and elucidates the tools and methodologies used for identifying, measuring, monitoring, and reporting model risk. It includes detailed sections on the principles of model risk management, enterprise risk management frameworks, model risk regulations and guidance, the three lines of defense in model risk management, and practical applications within the financial industry. Additionally, it addresses emerging trends and challenges, particularly in the context of generative AI models and future regulatory developments.

Key Features

Presents the principles and practice of Model Risk Management (MRM)
Covers risk management frameworks, regulatory guidelines, model risk types, and tools for identifying, measuring, monitoring, and reporting model risk
Serves as a valuable resource for advanced undergraduate and graduate students in finance, business, and economics, providing practical insights across disciplines
Operationalizes risk management principles specifically for model risks, enabling readers to design and implement effective MRM frameworks.
Includes Jupyter notebooks with standalone examples hosted online, enhancing the learning experience with practical, hands-on materials that complement the theoretical content

About the author

By Charlie Lu, Former Managing Director, Head of IHC Model Risk Management, Barclays, NY, USA and Peter Russo, Part-time Lecturer, School of Professional Studies, Enterprise Risk Management Program, Columbia University, NY, USA

Part I – Principles of Model Risk Management
1. Introduction to Model Risk Management
2. The Risk Management Framework- The Enterprise Risk Management Framework
3. Model Risk Regulations and Guidance in the US, EU, and UK
4. 1st Line - Model Development/Model Owners
5. 2nd Line - Independent Model Risk Management
6. 3rd Line Model Risk Management Audit

Part II – Practices of Model Risk Managements
7. Causes of Model Risk
8. Model Risk Management in the Financial Industry
9. Emerging Trends and Challenges
10. Conclusion Appendices - Glossary of Terms - References and Further Reading - Templates and Checklists

Principles and Practices of Model Risk Management (MRM),

Editors: By Charlie Lu and Peter Russo

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About the author

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