April 30, 2018

PRA published the policy statement PS7/18, which provides feedback to responses to the consultation paper CP26/17 on model risk management principles for stress testing. PS7/18 contains the final supervisory statement SS3/18, which sets out the PRA expectations on the model risk management practices that firms should adopt when using stress test models. The expectations in SS3/18 will take effect from June 01, 2018.

SS3/18 supports firms’ development and implementation of policies and procedures to identify, manage, and control the risks inherent in the use of stress test models. PRA expects the larger firms that participate in BoE’s annual concurrent stress testing to apply the principles contained in this supervisory statement in full. However, firms not participating in the annual concurrent stress testing of BoE should apply the principles on a proportionate basis, based on their size, complexity, risk profile, and the relevance of stress test models.

PRA had received three responses to the proposals in CP26/17. Respondents were supportive of the model risk management principles for stress testing, but they had requested further clarification, guidance, and alternative wording in some areas. Following the consideration of respondents’ comments, PRA has made a number of changes to the draft supervisory statement to make the statements in some principles clearer and provide greater clarity on the PRA expectations in specific areas.

 

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Effective Date: June 01, 2018

Keywords: Europe, UK, Banking, Stress Testing, Model Risk Management Principles, PS7/18, SS3/18, PRA

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