PRA consults on model risk management principles for banks

PRA has issued a consultation which proposes that all firms adopt five proposed principles to establish an effective model risk management (MRM) framework. The five proposed principles are:

  1. Model identification and model risk classification;
  2. Governance;
  3. Model development, implementation and use;
  4. Independent model validation; and
  5. Model risk mitigants.

The proposed principles set out what the PRA considers to be the core disciplines necessary for a sound MRM framework to manage model risk effectively across all model and risk types.

The five proposed principles are intended to complement existing requirements and supervisory expectations on MRM, and include proposals for:

  • a proportionate implementation within firms and across firms, in particular for firms that would qualify as a ‘simpler-regime firm’;
  • the identification and allocation of responsibility for the overall MRM framework to the most appropriate SMF holder;
  • reporting on the effectiveness of MRM for financial reporting to the audit committee; and
  • identifying and managing the risks associated with the use of AI technology in modelling techniques.

The consultation closes on Friday 21 October 2022.

Harshil Patel