bulletin-2011-12a.pdfVIP

OCC 2011-12 Attachment Board of Governors of the Federal Reserve System Office of the Comptroller of the Currency April 4, 2011 SUPERVISORY GUIDANCE ON MODEL RISK MANAGEMENT CONTENTS I. Introduction 1 II. Purpose and Scope 2 III. Overview of Model Risk Management3 IV. Model Development, Implementation, and Use5 V. Model Validation 9 VI. Governance, Policies, and Controls16 VII. Conclusion21 I. INTRODUCTION Banks rely heavily on quantitative analysis and models in most aspects of financial decision making. 1 They routinely use models for a broad range of activities, including underwriting credits; valuing exposures, instruments, and positions; measuring risk; managing and safeguarding client assets; determining capital and reserve adequacy; and many other activities. In recent years, banks have applied models to more complex products and with more ambitious scope, such as enterprise-wide risk measurement, while the markets in which they are used have also broadened and changed. Changes in regulation have spurred some of the recent developments, particularly the U.S. regulatory capital rules for market, credit, and operational risk based on the framework developed by the Basel Committee on Banking Supervision. Even apart from these regulatory considerations, however, banks have been increasing the use of data-driven, quantitative decision-making tools for a number of years. The expanding use of models in all aspects of banking reflects the extent to which models can improve business decisions, but models also come with costs.