Large Bank Examination Workshop February 2026

Session Objectives By the end of the session, participants will be able to: • Discuss the Supervisory Guidance on Model Risk Management (Basel, OCC 2011-12 / SR 11-07) • Define model risk and how it impacts banks • Explain the concept of “effective challenge” • Identify where models and model output have a material impact on business decisions

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Basel Model Risk Guidelines 1 • In July 2009 the Basel Committee on Banking Supervision issued a directive 1 requiring that financial institutions quantify model risk: 1. The model risk associated with using a possibly incorrect valuation 2. The risk associated with using unobservable calibration parameters. • Explicitly mandates a valuation adjustment that impacts Tier I regulatory capital to account for model risk.

1 Basel Committee on Banking Supervision: Revisions to the Basel II Market Risk Framework, July 2009.

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