Since 2017, Canada’s Office of the Superintendent of Financial Institutions (OSFI) has established Guideline E-23 to promote strong, enterprise-wide model risk management (MRM) practices. With rapid advancements in artificial intelligence (AI) governance, OSFI updated the regulation in 2022 to maintain its relevance and reliability. This blog post explores the importance of E-23, its key components, and how financial institutions can effectively implement these practices.
The Importance of E-23 for Model Risk Management Teams
E-23 is crucial for MRM teams as it outlines rigorous protocols for validating, testing, and managing models. It mandates periodic audits, re-validation, and documentation updates to ensure models remain effective and trustworthy. Given the inherent risks in banking operations due to flawed models, E-23 serves as a vital safeguard for stability and accuracy.
Real-World Example:
A Canadian bank faced significant losses due to an inaccurate credit risk model. Implementing E-23’s stringent validation protocols could have prevented these errors, highlighting the importance of robust MRM frameworks.
Key Components of E-23
1. Model Development
Maintaining an up-to-date model inventory is essential for risk management, regulatory compliance, and efficient decision-making. An accurate inventory provides clear insights into model performance and areas needing improvement.
Example:
The Bank of Montreal adopted an automated inventory system that tracks and prioritizes high-risk models, enhancing resource allocation and regulatory compliance.
2. Model Decommissioning
Proper decommissioning ensures outdated models are retired, reducing reliance on inaccurate data and maintaining a reliable model inventory.
Case Study:
A leading Canadian insurance company implemented a decommissioning protocol that retired 15 obsolete models, improving data accuracy and operational efficiency.
3. Model Change Management
Change management involves early vetting and validation to prevent errors, with thorough documentation providing a clear audit trail.
Insight:
RBC employs a change management framework that integrates automated validation tools, reducing errors and enhancing stakeholder trust.
4. Model Governance
A strong governance framework ensures compliance with OSFI standards, with documented and communicated changes to governing bodies.
Highlight:
CIBC established an MRM governance committee that regularly reviews frameworks against E-23 standards, ensuring continuous alignment and proactive risk management.
Benefits of E-23 Compliance
- Enhanced Model Integrity: Regular validation and audits ensure reliable models.
- Regulatory Compliance: Adherence to E-23 demonstrates commitment to robust risk management.
- Efficient Resource Allocation: Accurate inventories and decommissioning free up resources for new model development.
- Improved Decision-Making: Reliable models provide accurate data for strategic decisions.
- Stakeholder Trust: Transparent and documented processes build confidence among stakeholders.
Implementing E-23: Best Practices
- Automate Inventory Management: Use technology to maintain accurate model inventories.
- Regular Audits: Conduct periodic reviews to ensure compliance and identify gaps.
- Comprehensive Documentation: Maintain detailed records of model development, changes, and governance.
- Training Programs: Educate staff on E-23 standards and best practices.
- Proactive Governance: Establish committees to oversee MRM frameworks and ensure alignment with OSFI guidelines.
Implementing OSFI Guideline E-23 enhances the effectiveness and reliability of model risk management processes. By focusing on model development, decommissioning, change management, and governance, financial institutions can mitigate risks, ensure regulatory compliance, and foster a culture of continuous improvement.
Stay informed and proactive in managing model risks with E-23, and explore our insights on other key regulations like SR 11-7 and SS1/23 for comprehensive MRM strategies.
