U.S. Banking Regulators Issue Revised Model Risk Management Guidance, Excluding AI Models

The Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) have jointly released updated guidance on model risk management for banking organizations. The revised framework emphasizes tailoring risk management practices to each institution's size, complexity, and model risk profile. Notably, the guidance explicitly scopes out Generative AI and Agentic AI models, indicating that these emerging technologies will be addressed in future regulatory considerations.

Context

The Federal Reserve, OCC, and FDIC are key regulatory bodies overseeing the U.S. banking system. Previous guidance on model risk management had become outdated due to the increasing complexity of financial models. The revised framework reflects a growing recognition of the diverse risk profiles of banking institutions and the importance of adapting risk management strategies accordingly.

Why it matters

The updated guidance on model risk management is significant as it sets new standards for how banking organizations should approach risk assessment. By tailoring practices to the specific characteristics of each institution, regulators aim to enhance the stability of the financial system. Excluding AI models from the current framework highlights the rapid evolution of technology in banking and the need for future regulations to address these advancements.

Implications

The exclusion of AI models from the current guidance may lead to a temporary gap in regulatory oversight for these technologies. Banking organizations that heavily invest in AI may face uncertainty regarding compliance and risk management. As regulators develop new frameworks for AI, the financial industry will need to prepare for potential changes that could impact operational practices and risk assessments.

What to watch

In the near term, stakeholders will be looking for further clarification on how AI models will be regulated once they are included in future guidance. The banking sector may also begin to adjust its risk management practices in anticipation of these forthcoming regulations. Additionally, industry responses to the revised guidance could influence how quickly institutions adapt their strategies.