Supervisory Guidance on Model Risk Management (SR 11-7) Versus Enterprise-Wide Model Risk Management for Deposit-Taking Institutions (E-23): A Detailed Comparative Analysis

Abstract

The Federal Reserve Board (Fed) and Office of the Comptroller of the Currency (OCC) issued SR 11-7 (OCC 2011-12 for the OCC) on April 4, 2011, and the Federal Deposit Insurance Corporation (FDIC) adopted it as FIL-22-2017 on June 7, 2017. The Office of the Superintendent of Financial Institutions (OSFI) issued the Enterprise-Wide Model Risk Management for Deposit-Taking Institutions (E-23) Guideline in September 2017, with an effective date of November 1, 2017. The authors of E-23 were almost certainly aware of the text and application of SR 11-7 when writing their document. The significant differences between the two documents then, were conscious — and likely reflect either differences in style and approach to writing documents of this type, differences in substantive expectations regarding model risk management in financial institutions, or both. This paper attempts to discern the differences in expectations regarding model risk management for large, complex institutions between the U.S. supervisors (Fed, OCC, and FDIC) and OSFI. The U.S. supervisors’ approach, as expressed in SR 11-7, is more prescriptive than OSFI’s approach in E-23. Although both supervisors see their documents as principles-based, the Canadian document, with much less detail, seems to be more principles-based than the U.S. one. Given the less detailed language in E-23 and the Canadian supervisory approach more broadly, Canadian supervisors will likely have more leeway regarding the application of these principles in individual institutions than U.S. supervisors will. SR 11-7 often gives one specific, relatively detailed approach to fulfilling a general principle included in E-23, which may expect multiple possible approaches to meeting a specific principle. This divergence in approaches to writing directions for model risk management poses a challenge when trying to compare the supervisory expectations of U.S. and Canadian supervisors, which is exacerbated by the fact that E-23 is only now coming into force in Canada. Given the global prominence of SR 11-7, it is likely that Canadian supervisors considered the U.S. supervisory text, and that any high-level omissions are likely intentional. It is also important to keep in mind that SR 11-7 is “Guidance,” not regulation, and U.S. supervisors may not enforce all parts of SR 11-7 at all institutions.