Overview of the model risk management principles for banks

2.1 The PRA proposes a supervisory expectation for firms to meet five model risk management principles -and in most cases a number of subprinciples -designed to cover all elements of the model lifecycle. 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 PRA's proposed MRM principles are:

Principle 1 -Model identification and model risk classification

Firms have an established definition of a model that sets the scope for MRM, a model inventory, and a risk-based tiering approach to categorise models to help identify and manage model risk.

Principle 2 -Governance

Firms have strong governance oversight with a board that promotes an MRM culture from the top through setting clear model risk appetite. The board approves the MRM policy and appoints an accountable individual to assume the responsibility to implement a sound MRM framework that will ensure effective MRM practices.

Principle 3 -Model development, implementation and use

Firms have a robust model development process with standards for model design and implementation, model selection, and model performance measurement. Testing of data, model construct, assumptions, and model outcomes are performed regularly in order to identify, monitor, record, and remediate model limitations and weaknesses.

Principle 4 -Independent model validation