SUPERVISORY GUIDANCE ON MODEL RISK …

1 Federal Deposit Insurance Corporation SUPERVISORY GUIDANCE ON MODEL RISK management CONTENTS I. II. Purpose and III. Overview of MODEL Risk IV. MODEL Development, Implementation, and V. MODEL VI. Governance, Policies, and VII. I. INTRODUCTION Banks rely heavily on quantitative analysis and models in most aspects of financial decision They routinely use models for a broad range of activities, including underwriting credits; valuing exposures, instruments, and positions; measuring risk; managing and safeguarding client assets; determining capital and reserve adequacy; and many other activities.

a bank’s financial condition, a bank’s model risk management framework should be more extensive and rigorous. Model risk management begins with robust model development, implementation, and use. Another essential element is a sound model validation process. A third element is governance, which sets an

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