Large Bank Examination Workshop February 2026

Model Risk Management (MRM) • In the preceding sessions, we have seen that the use of models inevitably gives rise to model risk.

• Through many practical examples, we have learned that model risk can be subtle, complex, and difficult to identify.

• We have also seen that it can have devastating consequences when it is suddenly unmasked by changing market conditions.

• All this makes it essential that financial institutions establish, maintain and apply sound model risk management practices.

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Core Principles of MRM • Model Development, Implementation, and Use : Models must be built on sound theory, tested against data, and applied appropriately. • Model Validation : Independent validation is required to assess conceptual soundness, ongoing monitoring, and outcomes analysis. • Governance, Policies, and Controls : Institutions must have a robust governance framework, clear policies, and strong internal controls to oversee model risk. • Ongoing Monitoring : Models should be continuously monitored for performance and updated as needed. • Documentation : Comprehensive documentation of model design, assumptions, limitations, and validation results is essential.

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