Model Risk Management - Achieving better compliance with Hong Kong regulatory standards through benchmarking to PRA Supervisory Statement (SS) 1/23

July 2024

With the rapid pace of digitalisation, the importance of robust Model Risk Management (MRM) governance has become a strategic imperative for the financial service sector. Banks and securities firms are facing increasing challenges in maintaining a robust MRM framework due to the growing complexity and number of models to be maintained, which could potentially lead to adverse outcome or financial loss.

Till now, regulatory bodies in Hong Kong, such as the Hong Kong Monetary Authority (HKMA) and the Hong Kong Securities and Futures Commission (SFC) have yet to introduce consolidated MRM regulations. However, it is observed that specific model requirements have been imposed on a model-by-model basis that underlines an increasing regulatory scrutiny and enforcement on financial institutions’ governance and internal risk processes around model risk in order to keep pace with global regulators and the emerging reliance on models within financial institutions. 

Financial regulators across the globe have been gradually introducing requirements on model risk management through regulatory papers over the years. One notable reference is the PRA SS1/23 published by the Bank of England in 2023. It places emphasis on embedding MRM into the organisation, addressing both traditional risk types and emerging risks. In Hong Kong, this global standard gradually serves as an overarching principle and benchmark for peer banks and FIs to follow and implement, particularly in light of the recent regulatory requirements on models introduced by Hong Kong regulators.