In recent years, Middle Eastern banks and financial institutions have prioritized Model Risk Management solutions. They are seeking robust and sophisticated software to automate model monitoring and quarterly assessments. This focus on automation ensures compliance with the guidance and standards set by their respective central banks.
Central Bank of UAE Issues Regulations
On December 23, 2022, the Central Bank of UAE (CBUAE) published new regulations and standards. These include the Model Management Standard (MMS), applicable to all models used by banks, and the Model Management Guidance (MMG), specifically focused on Expected Credit Loss (ECL) models.
Model Management Standards
The MMS covers various aspects of model governance, including:
- Model Data Management
- Model Development
- Model Implementation and Usage
- Model Validation
- Implementation of Numerical Thresholds
Model Management Guidance for IFRS Models in a framework
The MMG builds upon the MMS governance and controls framework. It provides additional guidance for specific validation activities related to models used for International Financial Reporting Standards (IFRS).
This revised text streamlines the original content while maintaining the key points:
- Importance of Model Risk Management for Middle Eastern banks
- Focus on automation for compliance purposes
- Introduction of CBUAE’s regulations and standards
- Breakdown of the MMS and MMG scope
Challenges and Opportunities for Banks:
- Meeting Tight Deadlines:
The Central Bank’s high standards and short timeframe may pose challenges for many banks.
- System Upgrades:
Banks will likely need to move away from basic tools like spreadsheets and adopt more sophisticated Model Risk Management (MRM) systems.
- Expanded Scope:
Compliance now covers non-model areas like climate and environmental risks, as well as model governance at subsidiary and consolidation levels.
- Technology Solutions for Efficiency:
Separating model development from validation can be a key cost-saving factor when choosing an MRM technology solution.
- Long-Term Benefits:
Investing in and effectively implementing an MRM tool can not only help banks meet current deadlines but also prepare them for future requirements such as additional internal model approvals, AI/ML models, and climate risk management.
Overall Impact
The new regulations necessitate a consistent and structured approach to model risk management. Banks must effectively implement and potentially expand their MRM tools to facilitate collaboration between risk teams, MRM teams, IT, model developers, validators, and third-party service providers.
This revised text focuses on both the challenges and potential benefits for banks. It also clarifies the purpose of decoupling model development and validation and emphasizes the long-term value of MRM technology investment.
Author
Prashanth Belugali N
Principal Product ManagerPrashanth has two decades of experience working with large banks, asset managers, trading & capital markets models and model risk domain. He has worked as a quantitative analyst, delivery manager, and product engineer, and provided bespoke solutions in quants (asset management, trading) and risk management practices (credit risk, market risk, model risk), and data engineering to a global clientele
