PS6/23 – Model risk management principles for banks

The Prudential Regulation Authority (PRA) has published a new policy statement (PS6/23) as regards the implementation of new model risk management principles for banks and in-scope investment firms which also results in the issuance of a new supervisory statement (SS1/23) on same issue. The term model risk thereby refers to risks associated with the use and application of quantitative and qualitative models for diverse purposes.
The policy statement follows a corresponding consultation in June 2022 in which the Authority proposed a basic set of such model risk principles concerning the following (for more details, please see EventID 16115):
– the identification and classification of model risks;
– the establishment of adequate corporate governance policies and structures;
– the development of models, their implementation, subsequent testing, and redesign;
– model validation by independent parties; and
– determination of model risk mitigants and processes for their use.
In its policy statement now, the PRA outlines the responses it has received to its consultation and includes the final supervisory statement as it will be implemented from May 17, 2024. The PRA notes in this context that it has made some changes to the proposed version which include the following, among others:
– The regulator has made changes to the scope of application. As the outcome of its consultation (CP5/22) on a simpler firm regime for smaller, non-connected institutions is still pending (please see EventID 15882 in this context), the supervisory statement will initially only apply to firms taking an internal model approach to assess credit risk for own fund requirement determination purposes.
– The PRA has added implementation guidelines for firms being granted permission to use the internal approach for the first time following the publication of the supervisory statement. Specifically, these firms will have 12 months to comply with the new supervisory statement.
– The PRA has made modifications in Principle 2.2, Principle 1.3, and Principle 3.5 relating to Senior Management Function (SMF) accountability, model tiering, and model documentation for vendor models, respectively, to provide more clarity on certain issues.
– The PRA has revised Principle 3.5 as regards escalation processes to be „less prescriptive and more principles-based“.
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As these are only the key modifications made to the originally proposed supervisory statement, please refer to the original document for more detailed, comprehensive information.