A Model Risk Management Overview of E-23 Compliance Strategies

Since 2017, Canada’s Office of the Superintendent of Financial Institutions (OFSI) guideline E-23 has advocated for strong, enterprise-wide model risk management practices. With the vast advancements being made with artificial intelligence (AI) governance, the OSFI made upgrades to the regulation in 2022 ensuring that it stays reliable and relevant.

The Importance of E-23 for Model Risk Management (MRM) Teams

The E-23 framework is relevant for MRM teams due to its rigorous protocols for validating and testing models to ensure they stay effective and trustworthy. It also lays out procedures for making changes to models, such as re-validation and updating documentation. There are also periodic audits and reviews to ensure adherence while maintaining compliance with regulatory standards. 

Using models within banking operations inherently involves risk. These risks can arise for various reasons, such as if a model has a weak foundation and produces inaccurate analyses. This can have negative effects on a bank, so having a solid framework like E-23 in place is crucial for maintaining stability and accuracy. The scope of the framework includes model development, model decommissioning, model change management, and model governance.

Model Development 

Maintaining an up-to-date model inventory is critical for effective model risk management, efficient resource use, regulatory compliance, and improved decision-making. 

An accurate inventory helps organizations understand the purpose and status of their active models. Complying with E-23 demonstrates a commitment to robust risk management and improves decision making by providing clear insight on model performance. This compliance then exposes the areas that need improvement, and ensures decisions are based on validated data.

Managing a large number of models requires a lot of time, personnel, and technology. Tracking these models is challenging and gets harder with the number of models and the variety of users and owners involved. A well-maintained inventory helps streamline this process, prioritizing high-risk models and ensuring that all models are accounted for and managed properly. This approach also ensures that all framework modifications are tracked and approved, providing a clear audit trail.

This proactive approach helps tackle the complexities and challenges that come with using many models in financial operations.

Explore another regulation | How Model Risk Management (MRM) Teams Can Comply with SR 11-7

Model Decommissioning

Model decommissioning under E-23 is crucial because it guarantees that outdated or irrelevant models are retired from use, reducing the risk of relying on inaccurate data. This keeps the firm’s model inventory reliable and up-to-date with only validated models in use. 

Proper decommissioning also supports regulatory compliance and transparency. With this approach, firms can better allocate resources to maintain and develop new models, ultimately improving overall risk management and decision-making processes.

Model Change Management

Managing changes to models is important for keeping them reliable and accurate over time. Implementing forms of vetting and validation early on helps catch and fix errors, preventing bad results and minimizing risks. Proper documentation is key too, as it provides a clear record of the model’s development and changes.

While this change management may seem resource and time-intensive, it is beneficial in the long run by maintaining model integrity, improving decision-making, and building stakeholder trust. It also helps avoid regulatory penalties and boosts the firm’s reputation by demonstrating a commitment to MRM and compliance standards.

Read up on a different regulation | Navigating SS1/23: A Compliance Guide for Model Risk Management (MRM) Teams

Model Governance

Implementing a strong governing body within MRM practices is important for several reasons. With E-23, firms should review their MRM frameworks against the OSFI framework structure to ensure they align. Any personalized changes within the E-23 framework should be documented and communicated to the firm’s governing body. 

Aligning the firm’s MRM frameworks with OSFI’s E-23 helps guarantee compliance with regulatory standards and mitigates risks associated with undocumented changes.

Conclusion

By focusing on these areas, firms can guarantee that their frameworks comply with E-23 regulatory requirements and enhance the overall effectiveness and reliability of their model risk management processes. This approach also promotes a culture of continuous improvement and proactive risk management within the organization.