The Office of the Superintendent of Financial Institutions (OSFI) on Wednesday published a final guideline that sets out its expectations for managing and controlling the use of internal risk models by financial institutions.
Financial institutions are increasingly relying on models to determine their regulatory capital requirements, OSFI notes in its announcement, and for operational decision-making, stress testing, and other purposes.
The new guideline, “aims to provide institutions with comprehensive and clear guidance and common standards for enterprise-wide model risk management. It also outlines prudent practices for internal model development, review, approval, use and modification,” OSFI says in a news release.
The final version of the guideline includes revisions based on comments from the industry. As a result of those consultations, OSFI has decided to exclude foreign bank branches from the guideline. It has also decided that banks that are already approved to use internal models must comply with the new guideline by Nov. 1, whereas other institutions have until Jan. 1, 2019.
The new guideline, “… presents a minimum common standard for model risk management practices while taking into consideration the varying sizes and degrees of complexity of deposit-taking institutions. OSFI recognizes that the use of models poses different challenges for small and medium-sized institutions than for larger institutions and adjusts its expectations accordingly,” says Carolyn Rogers, OSFI assistant superintendent, in a statement.