KPMG has published a new guide titled “Model Risk Management: A Guide for Financial Institutions in Saudi Arabia,” designed to support the Kingdom’s financial sector amid its rapid expansion and increasing digitalization. The guide aims to help financial institutions navigate a more complex landscape shaped by technological advancements and evolving regulations.
The guide highlights the growing reliance of Saudi banks on third-party services for model development and validation. It emphasizes the importance of thorough documentation and real-time monitoring to ensure the reliability and transparency of these externally developed models. The guide also stresses the need for strong governance, advocating for careful oversight of both in-house and outsourced models to detect potential issues before they escalate.
A key area of focus in the guide is the integration of advanced models that address climate risks and expected credit losses. These models often depend on external variables and limited historical data, which require sophisticated qualitative approaches and expert judgment to ensure accuracy.
Additionally, the guide prepares financial institutions for upcoming regulations from the Saudi Central Bank, similar to those recently introduced by the UAE’s Central Bank, which aim to improve model quality and mitigate associated risks.
The guide also discusses the heightened risks during periods of economic growth or stress, where market shifts and changing consumer behaviors can increase data volatility, making model predictions more challenging. The scarcity of robust historical data during these times can diminish the reliability of models, complicating decision-making and increasing the likelihood of inaccuracies.
Despite these challenges, the guide outlines opportunities for the Saudi financial sector. It suggests that addressing these issues effectively can improve risk management capabilities and enhance resilience to adverse conditions. The adoption of advanced technologies is also seen as a way to increase efficiency and precision in managing risks, while compliance with new regulations can improve governance and transparency, fostering greater trust among stakeholders.
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