Model governance has become crucial for institutions aiming to mitigate risks and ensure regulatory compliance in today’s rapidly evolving financial landscape. It encompasses the framework, processes and practices that financial institutions employ to manage the lifecycle of models, ensuring they align with organizational objectives and regulatory requirements.
Understanding model governance
Model governance in banking is the structured approach to managing multiple compliance models. These models typically consist of three key components: information inputs (data and assumptions), processing (calculations and theories) and reporting (outputs). An effective modeling system can support better decision-making within your organization with reliable model outputs. Leveraging these accurate and reliable models will allow you to allocate resources efficiently, adapt to changes and gain a competitive advantage.
Effective model governance involves multiple stakeholders across the institution:
- Model owners: Typically, in the first line of business, they are responsible for owning the risk and documenting models.
- Risk department: Provides oversight and effective challenge to model owners.
- Information technology (IT) department: Ensures data completeness and accuracy, often integrating models with core systems.
- Audit (Third line): Provides oversight and audits the model risk management program.
Financial institutions must adhere to guidance from regulatory bodies such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). These regulators provide frameworks and guidelines to ensure institutions manage model risks effectively and maintain compliance. Regularly reviewing and comparing policies and procedures against regulatory guidance is essential for maintaining compliance.
