BSP plans guidelines to manage risks from firms’ use of models

THE BANGKO SENTRAL ng Pilipinas (BSP) plans to put in place guidelines to manage potential risks from financial institutions’ use of models for their business decisions or analysis.

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“The BSP recognizes the increasing reliance on models for quantitative analysis and critical business decisions within BSP-supervised financial institutions (BSFIs). The growing adoption of sophisticated models amplifies model risk, which can stem from flaws or limitations in the design, development, implementation, or use of models,” the central bank said in a draft circular posted on its website.

“The proposed policy emphasizes the importance of effective model risk management to mitigate potential adverse outcomes, such as financial losses, suboptimal strategies, and reputational damage — all of which can result from model-related risks.”

The proposed Model Risk Management (MRM) guidelines, if approved, will become part of rules on operational risk management and resilience that cover both banks and nonbank financial institutions.

The central bank said BSFIs that use models must have “sound and comprehensive” MRM frameworks that are appropriate for their size, operational complexity, risk profile, and extent of model usage.

“Overall, the MRM guidelines aim to strengthen the operational resilience and risk management practices of BSFIs, aligning with international standards and domestic practices to mitigate potential adverse outcomes associated with model use.”

The draft defines a model as a “quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions, including artificial intelligence and machine learning, to process input data into output.”

It is made up of input, processing, and output components, which involve the use of data, assumptions and scenarios to make forecasts or predictions that financial institutions can use for their business decisions.