During RMA’s inaugural Model Risk Management Summit on December 1-2, 2021, regulatory leaders from the OCC, FDIC, and the Federal Reserve Board gathered for a live supervisory roundtable. These model risk management supervisors fielded questions from the audience as they offered lessons learned from the pandemic, details on the OCC’s recently published handbook, and guidance on managing third-party vendors and modeling for climate risk.
To prepare for future events like a pandemic, panelists recommended developing a more anticipatory mindset towards model risk governance. “Understand the limitations of your models on the front end, and not just having to respond when they go haywire," recommended David E. Palmer, of the Division of Banking Supervision and Regulation at the Federal Reserve Board.
Risk managers can prepare for unexpected events by identifying model interactions and dependencies. Referencing a model “control panel” that monitors the links between these model systems can help a risk manager understand problems that may cascade down linked models, according to Alireza Ebrahim, senior financial economist at the OCC.
Ebrahim expanded upon the OCC’s Model Risk Management booklet of the Comptroller’s Handbook, published on August 18, 2021. The handbook’s latest update was not intended to change or extend existing guidance, according to Ebrahim. Instead, the goal was to provide examiners with a solid background on how model risk management has evolved since the issuance of OCC 2011-12 (also referred to as SR 11-7) in 2011.
Supervisors also discussed best practices in engaging with third-party vendors and hiring validation service providers. Model risk managers have been challenged by a lack of access to key details when working with vendors, including what assumptions and datasets vendors used to train their models. Jitendra Rathod, Senior Quantitative Risk Specialist at the FDIC, emphasized the importance of conducting sensitivity analysis in these situations.
During the roundtable, attendees asked supervisors for their thoughts on climate risk and potential impacts on and implications for model risk management. The Fed’s Palmer said climate risk could affect existing model assumptions, particularly those used in commodities and agricultural lending.
The OCC’s Ebrahim noted that agencies still have the same expectations for climate as they do for other risk scenarios. Ebrahim added his agency planned to release additional guidance soon. On December 16, 2021 the OCC announced draft principles to support the identification and management of climate-related financial risks. The guidance is aimed at banks with more than $100 billion in assets, but, as RMA President and CEO Nancy Foster noted in a Wall Street Journal article (subscription required), it has the potential to influence banks of all sizes.
After a productive and interesting 2021, RMA will continue to advance leading practices in model risk management throughout 2022, including with the release of our latest survey on vendor model validation and third-party risk management in the first quarter.
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