The FDIC today announced that it is adopting the supervisory guidance on managing “model risk” that was previously issued by the Federal Reserve and the OCC in 2011. The guidance addresses the potential for damage when models play a material role in bank decision-making. The FDIC said the guidance is “not expected” to apply to banks with less than $1 billion in assets unless “the institution’s model use is significant, complex or poses elevated risk to the institution.”
The guidance describes risk management practices related to model use, including effectively challenging models through model validation, strong governance, internal audit coverage and clear internal policies and documentation. It also addresses how to incorporate third-party vendor models into the institution’s overall risk management framework, and it advises banks to watch for whether model use can increase consumer compliance or fair lending risk.
The American Bankers Association offers numerous resources for bankers managing model risk. For example, ABA’s Regulatory Compliance Conference, which opens this weekend in Orlando, Fla., features sessions on model risk. On June 21, ABA will host a webinar on managing model risks in dynamic markets.