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. In recent years, banks have applied models to more complex products and with more ambitious scope, such as enterprise-wide risk measurement, while the markets in which they are used have also broadened and changed. Changes in regulation have spurred some of the recent developments, particularly the regulatory capital rules for market, credit, and operational risk based on the framework developed by the Basel Committee on Banking Supervision.

existing guidance—most importantly by broadening the scope to include all aspects of model risk management. Many banks may already have in place a large portion of these practices, but banks should ensure that internal policies and procedures …

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