Back in April, the Prudential Regulation Authority (PRA) published its Supervisory Statement (SS 3/18), setting out its expectations as to the model risk management practices that firms should adopt when using stress test models.
The PRA’s model risk management principles for stress testing are centred on four key principles:
In the following articles we explore what each of the principles mean and more importantly what the pitfalls are and how you can make sure you don’t fall foul of the regulator.
Banks have implemented a robust model development and implementation process to ensure appropriate use of models | Have you got a robust model development and implementation process and can you demonstrate it to the regulator?
Banks undertake appropriate model validation and independent review activities to ensure sound model performance and greater understanding of model uncertainties | As with the other three principles, the PRA gives sound, common sense guidance overall but leaves a lot of practical matters untouched and questions unanswered.