Principle 1 - Model identification and model risk classification

Firms should 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 1.1 Model definition

A formal definition of a model sets the scope of an MRM framework and promotes consistency across business units and legal entities.

a) Firms should adopt the following definition of a model as the basis for determining the scope of their MRM frameworks:

A model is a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into output. The definition of a model includes input data that are quantitative and / or qualitative in nature or expert judgement-based, and output that are quantitative or qualitative.

b) Notwithstanding the above definition, where material deterministic quantitative methods such as decision-based rules or algorithms that are not classified as a model have a material bearing on business decisions [Business decisions should be understood here as all decisions made in relation to the general business and operational banking activities, strategic decisions, financial, risk, capital and liquidity measurement, reporting, and any other decisions relevant to the safety and soundness of firms.] and are complex in nature, firms should consider whether to apply the relevant aspects of the MRM framework to these methods.