Regulatory Alerts2021-11-08
Principles for Model Risk Management
The Financial Services Agency of Japan (FSA) issued these Principles for Model Risk Management to clarify its approach and articulate expectations for systemically important financial institutions regarding the comprehensive management of risks arising from all types of models. The document outlines eight principles covering governance, model identification, development, approval, ongoing monitoring, validation, vendor products, and internal audit, emphasizing a "Three Lines of Defense" framework and a risk-based approach across the model life cycle. Firms are expected to establish a robust framework commensurate with their risk profile, ensuring effective review and challenge to mitigate potential adverse consequences from inappropriate or misused models.