The PRA’s Latest Expectations for Banks’ Model Risk Management

The Federal Reserve Board’s Supervisory Report

In the US, the Federal Reserve Board highlighted non-financial weaknesses, such as IT governance and risk management issues, in US financial institutions for the first time in their 2019 Supervisory Report.

The FEDs report, for the most part, was reassuring and encouraging. Their findings were that the US banking system is sound, profitability is robust and capital and liquidity levels are as they should be.

However, of the supervisory findings in these institutions currently outstanding, over 60% pertain to these non-financial weaknesses.

This was a wake-up call for firms and a warning that they could have the regulator knocking at their door if the issues are left unaddressed – Citi’s consent order was evidence of this.

The OCC’s Model Risk Management Handbook

The OCC followed the FEDs report to release their model risk management handbook last year. Representatives from the OCC were clear that this was not to provide additional model risk management requirements, but to provide clarification of SR11-7 and their expectations from firms.

Nevertheless, for some of the firms affected by this model risk management handbook, these “clarifications” were far from straightforward and required significant policy and framework adjustments.

The PRA’s CP6/22 on Model Risk Management

Returning to CP6/22, we can foresee that highly dynamic, larger firms that have mature model risk management programs should be well set.

However, similar to when the OCC’s handbook was released, the more granular definitions are creating a number of work streams. To highlight some of these areas: