OSFI released the final version of the Guideline E-23 on Enterprise-Wide Model Risk Management. The guideline establishes OSFI’s expectations for institutions in managing and controlling the use of models, whether for regulatory capital determination, internal risk management, valuation/pricing, business decision-making, or stress testing. Standardized institutions, as defined in the guideline, will have until January 01, 2019 to become compliant with this guideline. All other institutions (that is, internal-models-approved institutions) are expected to comply with the guideline by November 01, 2017.
The guideline has been revised to reflect comments received during the public consultation, which ended on February 28, 2017. Deposit-taking institutions are increasingly relying on models for not only regulatory capital determination but also for valuation and business decision-making purposes. Guideline E-23 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. This guideline applies to all models that have a material impact on the risk profile of an institution; for example, models used for regulatory capital determination, internal risk management, valuation/pricing, business decision-making, or stress testing purposes.
This consultation had included targeted discussions with several foreign bank branches on the proposed scope of coverage. These discussions have led OSFI to exclude foreign bank branches from the scope of the guideline, since OSFI believes that it has the capacity to assess model risk management of these institutions within existing supervisory processes. A footnote to the guideline clarifies that the Principal Officer of a foreign bank branch is accountable for ensuring there are appropriate risk controls over model risk, where material. Annex 1 summarizes comments of substance that were received from stakeholders and explains how they have been addressed.
Effective Date: January 01, 2019
Keywords: Americas, Canada, Banking, Enterprise Wide Risk Management, Guideline E-23, OSFI