Principles for model risk management

In June 2022 the PRA published a consultation document CP6/22 – Model risk management principles for banks which set out a set of 5 principles which it is expected will help banks improve the effectiveness of their model risk management frameworks.

The draft principles, which are intended to complement existing requirements and supervisory expectations on model risk management over the model lifecycle, are:

• Principle 1: Model identification and model risk classification – banks are expected to have model definitions, a model inventory and risk-based tiering model to help manage model risk;

• Principle 2 : Governance – there is strong governance oversight from the board which sets clear model risk appetite, approves MTM policy and assign responsibility to an individual accountable for implementation;

• Principle 3 : Model development, implementation and use – banks have a robust model development process and regular testing;

• Principle 4 : Independent model validation – banks have an ongoing, independent and effective challenge process and model approvers ensure that validation recommendations are actioned;

• Principle 5 : Model risk mitigants – banks have policies and procedures for the use of model risk mitigants when models are under-performing.

The consultation is open until 21 october 2022.

See section 24.4 for an explanation of the model lifecycle and 24.5 for further details on model risk.