Glossary
Model risk
The risk of loss from decisions based on incorrect or misused models.
Model risk is the potential for adverse outcomes — financial loss, poor decisions, or reputational and regulatory harm — arising from errors in a model or from using a model incorrectly. Managing it is the subject of SR 11-7.
Generative AI introduces model risk in new forms: non-determinism, prompt sensitivity, and shadow usage. Bringing LLMs into a model inventory with monitoring and documentation is how firms keep that risk governed.