The Office of the Comptroller of the Currency (OCC) issued guidance today that provides a clear statement of expectations for banks that use quantitative models in any aspect of their business. The guidance addresses “model risk,” which is the potential for damage when models play a material role in bank decision making.

“Model risk should be treated like other risks,” Mark Levonian, Senior Deputy Comptroller for Economics at the OCC said. “Banks need to identify the sources of risk, assess the magnitude of the risk, and take steps to control that risk.”

The new guidance, developed jointly with the Board of Governors of the Federal Reserve System, describes a number of important risk management practices related to model use, including “effective challenge” of models through model validation, strong governance, internal audit coverage, and clear internal policies and documentation.  Read the full press release at the website of the Office of the Comptroller of the Currency.