What Guidance on Model Risk Management requires
This supervisory guidance, issued by the Federal Reserve and the Office of the Comptroller of the Currency (OCC), is intended for use by banking organizations and supervisors to assess the management of model risk. It applies to all banking organizations supervised by the Federal Reserve, taking into account each organization’s size, nature, complexity, and the extent of its use of models. The guidance defines a model as a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories to process input data into quantitative estimates. The core obligation is for banking organizations to be attentive to the possible adverse consequences of decisions based on models that are incorrect or misused. Organizations must address these consequences through active model risk management, which includes robust model development, implementation, and use; effective validation; and sound governance, policies, and controls. Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs, which can lead to financial loss, poor business and strategic decision-making, or damage to a banking organization’s reputation. A guiding principle is the 'effective challenge' of models, which involves critical analysis by objective, informed parties that can identify model limitations and produce appropriate changes.
Pillar: Banking & Global Finance · Authority: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM · Version: 1.0.0 · Last updated:
Primary source: https://www.federalreserve.gov/frrs/guidance/supervisory-guidance-on-model-risk-management.htm
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- Page 2: The term model refers to a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates.
- Page 2: Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Model risk can lead to financial loss, poor business and strategic decision-making, or damage to a banking organization's reputation.
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