PRA Consults on Model Risk Management Principles for Stress Testing
PRA published the consultation paper CP26/17, which sets out proposals to support effective practices in model risk management for stress testing. The consultation will close on March 06, 2018 while the proposed implementation date for the proposal in CP26/17 is June 01, 2018.
A set of principles has been developed in the context of the annual concurrent stress testing process, which tests the resilience of the banking system and some of the largest firms within it. PRA proposes to embed these principles further for firms participating in the annual concurrent stress tests, while also extending them, in a proportionate manner, to the wider banking sector. PRA proposes that firms participating in the annual concurrent stress test of BoE should adopt the principles in full. In addition, firms not participating in the annual concurrent stress test of BoE should seek to apply the principles on a proportionate basis, taking into account their size, complexity, risk profile, and the relevance of using the stress test models. The principles are set out in a draft supervisory statement titled "Model risk management principles for stress testing." CP26/17 is relevant to PRA-authorized banks, building societies, and PRA-designated investment firms. Credit unions are not in scope and there is no proposal to extend the principles to insurance and reinsurance firms.
The primary objective of stress testing is to help regulators and firms assess capital positions under adverse economic conditions. This exercise allows regulators to help inform the setting of capital requirements for both micro-prudential and macro-prudential purposes. Banks are also increasingly using the results of stress tests to inform strategic and business decisions.
Related Link: CP26/17 (PDF)
Comment Due Date: March 06, 2018
Effective Date: June 01, 2018
Keywords: Europe, UK, Banking, Model Risk Management Principles, Stress Testing, PRA
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