PRA publishes model risk management principles for stress testing

PRA has published a policy and supervisory statement setting out its expectation of the model risk management practices firms should adopt when using stress test models. It expects firms to apply the principles proportionately, with the larger firms applying them in full. The principles require banks:

  • to have an established definition of a model, and maintain a model inventory
  • to have implemented an effective governance framework, policies, procedures and controls to manage their model risk
  • to have implemented a robust model development and implementation process and ensure appropriate use of models and
  • to undertake appropriate model validation and independent review to ensure sound model performance and greater understanding of model uncertainties.