The PRA has published Consultation Paper 26/17: Model risk management principles for stress testing (CP26/17). CP26/17 sets out the PRA’s proposals to support effective practices in model risk management for stress testing.
In March 2017, the PRA communicated a set of principles on stress test model management to the firms participating in the Bank of England’s (BoE) concurrent stress test, which tests the resilience of the banking system and some of the largest firms within it. Drawing on this experience, the PRA proposes to embed these principles further for firms participating in the annual concurrent stress tests, while also extending them, in a proportionate manner, to the wider banking sector.
The four principles set out in CP26/17 are designed to support firms in developing and implementing policies and procedures through which to identify, manage and control the risks inherent in the use of stress test models and meet the high standards of risk management and internal governance already required of them under the Capital Requirements Directive IV and the PRA Rulebook. The PRA proposes that:
- firms participating in the BoE annual concurrent stress test adopt the principles for all stress test models;
- firms not participating in the BoE annual concurrent stress test should take into account their size, nature, scale, complexity of business activities and use of stress test models when seeking to apply the principles;
- all firms applying the principles undertake a self-assessment of their stress test model risk management practices against the principles as part of the internal capital adequacy assessment process (ICAAP) and report the findings in the ICAAP documents from 1 January 2019 onwards, depending on the frequency of the supervisory review and evaluation process; and
- for firms participating in the annual concurrent stress test, an assessment of stress test model risk management practices forms part of the qualitative review component from the third quarter of 2018 onwards.
The consultation closes to responses on 6 March 2018.
View PRA consults on model risk management principles for stress testing by banks, building societies and PRA-designated investment firms, 6 December 2017