The Prudential Regulation Authority’s (PRA’s) Supervisory Statement (SS) 1/23 on model risk management (MRM) principles for banks, effective May 17, 2024, marks a pivotal milestone in the regulatory landscape.

It establishes enterprise-wide requirements for identifying, measuring, monitoring and controlling model risk across models.

Model risk, driven by increasing reliance on models in banking, is poised to become “a risk discipline in its own right”. Recognising this, regulators worldwide are increasingly developing guidelines for its effective management.

SS 1/23 underscores the importance of robust MRM practices, acknowledging that not all models pose the same level of risk.

This paper delves into the key tenets of SS 1/23 and their implications for banks, focusing on model identification and classification, governance, development, implementation and use, independent validation, and risk mitigation strategies.

It emphasises the need for a holistic approach to MRM that aligns with the PRA’s mandate.

Out-of-scope banks should take note of the PRA expectation — irrespective of the scope of application of SS 1/23 and regardless of size, all banks are expected to manage the risks associated with models and apply supervisory expectations relevant to them.