US model risk rules put lions back in their cages

Impact of Federal Reserve and OCC model risk guidance is being felt well beyond US banks

Recent years have seen a quiet but significant shift in the way many major banks address model risk. Previously, many bank models were not subject to a rigorous, centralised model risk framework. A handful of model validators would validate and approve models, sometimes without questioning what they were actually being used for.

In practice, this gave a lot of freedom to users of models – and in particular, traders – to dictate those models' parameters and how they were used. Now, this freedom i