What does SR 11-7 require for model validation governance?

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AcadiFi · Accepted Answer

SR 11-7 (Supervisory Letter, 2011) and its OCC counterpart (2011-12) establish model risk management (MRM) as a discipline equal in importance to credit and market risk. The three pillars are: 1. Model development, implementation, and use. Models must be designed by qualified staff, with sound conceptual bases, rigorous testing, and documented assumptions. 2. Model validation. Independent review of conceptual soundness, ongoing monitoring, and outcomes analysis — the three components of effective challenge. 3. Governance, policies, and controls. A board-approved MRM framework, a senior officer responsible for MRM (often a CMO — Chief Model Officer), and an enterprise-wide model inventory. ```mermaid flowchart TD A[Board
Oversight] --> B[Senior
Management] B --> C[Model
Development] B --> D[Independent
Validation] B --> E[Internal
Audit] C --> F[Effective
Challenge] D --> F E --> G[Third Line
Assurance] ``` Key governance requirements: - Three lines of defense. First line: model developers and owners. Second line: independent validation function. Third line: internal audit reviewing the MRM framework itself. - Effective challenge. Validators must have authority, stature, and incentives to challenge first-line assumptions. They cannot report to development. - Model inventory. Complete, centralized register of every model, with tier classification (high/medium/low materiality) driving validation intensity. - Board reporting. MRM metrics, validation findings, and model risk aggregation reported to risk committee quarterly. A concrete example: Starfield National Bank created a CMO function reporting directly to the CRO, established a validation group of 40 quants segregated from front office, and built a central inventory of 1,200 models across credit, market, AML, and capital planning. Tier 1 models (CCAR loss projection, PFE) get annual full revalidation; Tier 3 (small business scorecards) get biennial lighter review. FRM Part II exam: know the three pillars and the role of effective challenge.

What does SR 11-7 require for model validation governance?

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