A model is defined as a method, system or approach used to process data using assumptions to arrive at a quantitative estimate. He noted how banks utilize a number of models in the decision-making process in a number of key areas to measure capital adequacy, underwrite loans and primarily to measure interest rate risk.

He discussed the factors that financial managers must evaluate in order to implement models effectively including validation, maintenance and the potential loss from reliance on improper assumptions. Salvatore concluded by recommending the roles and responsibilities that institutions should establish for successful model implementation. He stressed the importance of an independent review process and the important role that a bank’s internal audit function should play in the overall effectiveness of the risk management framework.