Safety and Soundness: Model Risk Management

A Model is a quantitative method, system or approach that applies statistical, economic and financial, or mathematical theories, techniques and assumptions to process input data into quantitative estimates. It is stressed that the importance of a Model Risk Management is due to that without proper risk management, model input errors, inaccurate assumptions, and untimely or missing valuations, risk could increase due to board and management decisions being based on inaccurate or incomplete model outputs. In this context, the Office of the Comptroller of Currency (OCC) has published the Model Risk Management (MRM) Handbook, which outlines key roles and responsibilities within the model life cycle.

Safety and Soundness: Model Risk Management

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Executive summary

The OCC has published the MRM handbook, which outlines key concepts, practices, and guidelines designed to aid examiners in performing consistent, high-quality model risk management examinations.

Main content

This Technical Note summarizes the main aspects of the MRM handbook:

• Overview of models. Brief overview of models, other quantitative tools, and their usage in banking activities. And Discussion of risks arising from model use, broken down into eight different types: i) strategic risk; ii) operational risk; iii) compliance risk; iv) credit risk; v) Liquidity risk; vi) Interest rate risk; vii) price risk; and viii) reputation risk.
• Risk Management. The OCC defines: i) typical MRM procedures conducted by examiners; ii) core elements to consider for each step of the model life cycle and iii) the key takeaways for the improvement of MRM strategy. It is stablished that sound model governance includes: i) board and management oversight; ii) policies and procedures; iii) a system of internal controls, internal audit, a model inventory, and iv) documentation. It also specifies distinctions in MRM for AI models, financial crimes models, and vendor models.
• Exam procedures. As a follow-up to the risk management section, specific lists of questions to consider during each step of the MRM process are defined.

Download the technical note by clicking here.