BSP wants banks to adopt model risk management
The Bangko Sentral ng Pilipinas (BSP) is proposing regulations that would help financial institutions manage risks emanating from their reliance on models for critical business decisions and analysis.
Specifically, the BSP wants banks to be able to identify flaws in their models that could result in bad outcomes and financial losses for the company.
The central bank is currently collecting comments from stakeholders on a draft circular carrying such a proposal.
A model refers to a quantitative method, system or approach that applies statistical, economic, financial or mathematical theories, techniques and assumptions to process input data into output. This also includes artificial intelligence and machine learning.
The BSP said the growing adoption of sophisticated models amplifies model risk. This can stem from flaws or limitations in the design, development and implementation of the models.
“The proposed policy emphasizes the importance of effective model risk management to mitigate potential adverse outcomes, such as financial losses, suboptimal strategies, and reputational damage—all of which can result from model-related risks,” the BSP said.
To do this, the regulator will compel banks to develop and adopt their own model risk management (MRM) guidelines.
This framework must cover supervisory expectations for managing model risks throughout their entire life cycle—encompassing development, validation, implementation, use and monitoring.
The proposed policy provides a two-year transitory period from the effective date of the issuance.
Within the first year, the BSP said regulated entities are expected to develop an implementation program. This includes a detailed plan of action with specific timelines and the status of initiatives undertaken to develop their respective MRM framework.
“Overall, the MRM Guidelines aim to strengthen the operational resilience and risk management practices of [financial institutions], aligning with international standards and domestic practices to mitigate potential adverse outcomes associated with model use,” the central bank said.
