Large Bank Examination Workshop February 2026

Discussion: Effective Challenge • A guiding principle for managing model risk is effective challenge: critical analysis by objective, informed parties who can identify model limitations and suggest appropriate changes. 1. Why might model users fail to offer effective challenge to a model?

2. What structures, processes and behaviors can a bank use to encourage effective challenge?

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Key Areas Where Models Drive Decisions for Banks • Risk Management & Capital Adequacy  Models determine credit, market, and operational risk exposure , which directly influences how much capital banks must hold under Basel regulations.  Stress testing and scenario analysis help banks prepare for adverse economic conditions. • Credit Decisions & Lending  Credit scoring models assess borrower risk, distinguishing between “good” and “bad” borrowers.  These models guide loan approvals, interest rate setting, and provisioning for defaults.

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