This A Closer Look is the second in a series providing recommendations on mitigating model risks and improving the efficiency of various model governance activities. The first, Model Risk Mitigation and Cost Reduction through Effective Design, focused on risk mitigation and cost reduction strategies targeted at model implementation and operation. Here we discuss regulatory requirements and leading practices around model documentation, and how high-quality documentation can help mitigate model risk and reduce model-related costs.
As financial institutions in the US and around the globe strengthen their model governance programs, high-quality model documentation has become increasingly important as the foundation for well-controlled model development, testing, implementation, use, and validation. Despite its widely recognized importance, we find that firms tend to under-invest in writing complete, accurate, well-organized, and up-to-date model documentation. This continues despite a significant emphasis placed on model documentation by the regulators, including the OCC, Federal Reserve, and FDIC.