REGULATORY REQUIREMENT

CRD IV / CRR – Capital Requirements Framework

The EU implementation of the BASEL III capital adequacy standard including model governance and documentation obligations

Key requirements

  • All material elements of the internal models and the modelling process and validation shall be documented
  • Changes in estimation and validation methods and changes to data sources and periods covered, shall be documented
  • The internal model and the modelling process shall be documented, including the responsibilities of parties involved in the modelling, and the model approval and model review processes
  • Where the institution employs statistical models in the rating process, the institution shall document their methodologies.

SR 11-7 Guidance on Model Risk Management

FED and OCC supervisory guidance laying out minimum requirements for model risk management practices including model documentation

Key requirements

  • Make model developers responsible for thorough documentation and provide incentives to produce effective and complete documentation
  • Model documentation should be kept up to date as the model and application environment changes
  • Ensure that other participants in model risk management activities document their work
  • The business or other decision makers should document information leading to selection of a given model and subsequent validation
  • Ensure appropriate documentation is available from vendors or other third parties when using models developed externally

ECB Targeted Review of Internal Models (TRIM)

  • All internal models should be documented in such a way that a third party would be able to understand the methodology, assumptions, limitations and use of the model.
  • (a) Institutions should have a concept of what constitutes a model; this concept should be documented/fall under model governance. Identified models should be inventoried in a manner that facilitates a holistic understanding of their application and use.
  • (b) The thoroughness of model governance should be proportionate to the materiality of the model. However, it is expected that all models that are used for business decisions should be properly documented.
  • The scope of the required documentation (e.g. areas to be covered) for each type of model should be properly defined. Areas to be covered include the technical aspects of the model (methodology and assumptions), instructions for model users and performance/validation (including the results of implementation testing)

Basel Committee on Banking Supervision – BCBS 239

Risk Data Aggregation Capabilities:

  • Ensure processes and controls are put in place prior to risk calculation
  • Ensure data quality monitoring and process applied
  • Ensure documentation is produced
  • Ensure completeness, accuracy, integrity and timeliness