The FDIC’s annual safety and soundness examination can be an uneasy and disruptive moment for any financial institution, but for one regional bank with $15 billion in total assets, the anxiety was heightened—and, as it turned out, justified.
To assess the bank’s safety and soundness, the agency’s supervisory team conducted a full-scope, on-site examination of the bank’s performance based on its financial condition, operational controls, risk management practices, and compliance with banking regulations.
The bank had only recently hired an employee to help oversee model risk management. That individual planned to further mature the bank’s model risk function to ensure that: 1) its models predicted results based on inputs that were developed and used appropriately, and 2) its outputs were accurate and reliable. Since models play a significant role in a modern financial institution’s decision-making processes, model risk has emerged as a key concern for financial institutions and industry regulators.
When the examiners arrived, this new resource hadn’t yet had a chance to delve into the details of the institution’s existing model risk program. As a result, the program fell short of regulatory expectations during the examination. After the FDIC examiners concluded their examination, they issued multiple Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs) around maturing the model risk function, framework, and execution of the framework, and they set a tight timeline to remediate the issues.