In May 2023, the PRA has issued a Supervisory Statement (SS1/23) as part of a Policy Statement (PS 6/23) which also incudes feedback on the consultation paper (CP) 6/22 - Model Risk Management Principles for Banks. The policy becomes effective on Friday, 17 May 2024.

What does SS1/23 include?

  • Guidance and sets standards for how the regulated UK-incorporated banks, building societies, and PRA-designated investment firms should manage model risk. Notably, the SS does not apply to credit unions, insurers, and reinsurers, but third-country firms operating in the UK through a branch can still benefit from the outlined principles.
  • When the Supervisory Statement (SS) was published, the Prudential Regulation Authority (PRA) had not finalised its definition of 'Simpler-regime Firms' within the Strong & Simple Framework. As a result, at this stage the PRA has narrowed the scope of the expectations in SS1/23 to apply only to firms with internal models (IM).
  • It presents five high-level principles that encompass the entire model lifecycle, enabling effective management of model risk across all model and risk

What's the purpose of SS1/23?

To enhance and fortify the policies, procedures, and practices concerning the utilisation of various models within regulated institutions. This includes models
developed both internally and externally, as well as those used for financial reporting purposes.

What's PRA’s view?

The PRA views the principles in the Supervisory Statement (SS) as essential core disciplines for achieving effective Model Risk Management (MRM) across all models and risks, promoting MRM as a distinct risk discipline for firms.

What does it mean for European banks?

The 2023 guide to internal models published by the ECB offers high-level information on implementing the model risk management framework. Although the Model Risk Management Supervisory Statement is specifically aimed
at UK banks, the detailed principles and practices it contains can be customised and utilised to support European banks as well.