SAMA’s Expectations on Model Governance Under IFRS 9

The Saudi Central Bank (SAMA) has set clear and robust expectations for model governance under IFRS 9, reflecting the increasing complexity and significance of financial models in risk management and financial reporting. IFRS 9, with its forward-looking approach to impairment, demands sophisticated models to estimate Expected Credit Losses (ECLs). Effective model governance is therefore not merely a regulatory compliance exercise but a critical component of sound financial management and stability for financial institutions operating in Saudi Arabia.

The Core of SAMA’s Expectations

SAMA’s framework for model governance under IFRS 9 generally aligns with international best practices, emphasizing a holistic approach that covers the entire model lifecycle. Key areas of focus include:

Clear Roles and Responsibilities:

1. Board and Senior Management Oversight: SAMA expects the Board of Directors and senior management to take ultimate responsibility for the institution’s model risk management framework. This includes approving the model risk appetite, policies, and procedures, and ensuring adequate resources are allocated.
2. Dedicated Model Risk Management Function: A strong, independent model risk management (MRM) function is crucial. This function is responsible for the independent validation of models, monitoring model performance, identifying model limitations, and reporting model risk to senior management and the Board.

Robust Model Development and Documentation:

1. Sound Methodology: Models must be developed using sound theoretical foundations, appropriate statistical techniques, and relevant data. The chosen methodology should be clearly justified and documented.
2. Comprehensive Documentation: Detailed documentation is expected for every model, covering its purpose, scope, underlying assumptions, data inputs, methodologies, limitations, and validation results. This ensures transparency, reproducibility, and effective knowledge transfer.

Independent Model Validation:

1. Comprehensive Validation: Models must undergo rigorous independent validation by a party not involved in their development or ownership. This validation should assess conceptual soundness, accuracy, completeness, and consistency of the model with its intended use.
2. Challenging Assumptions: Validators are expected to critically challenge model assumptions, data inputs, and methodologies, performing sensitivity analyses and stress testing to understand model behavior under various scenarios.
3. Documentation of Validation: Validation reports should clearly articulate findings, recommendations, and the materiality of identified deficiencies.

Ongoing Model Monitoring and Review:

1. Performance Monitoring: Continuous monitoring of model performance against actual outcomes is critical. This includes back-testing, benchmarking, and tracking key model inputs and outputs.
2. Regular Review: Models should be subject to periodic review (e.g., annually or biennially) to ensure their continued relevance, accuracy, and compliance with regulatory requirements. Changes in business environment, product features, or data availability may necessitate more frequent reviews or recalibrations.
3. Change Management: A robust change management process is required for any modifications to existing models, including re-validation when significant changes are made.

Integration with Internal Controls and Audit:

1. Internal Controls: Model risk management should be integrated into the institution’s broader internal control framework, ensuring that appropriate controls are in place to mitigate identified risks.
2. Internal Audit: Internal audit should periodically review the effectiveness of the model risk management framework, providing an independent assessment of its design and operational effectiveness.

Why SAMA’s Focus on Model Governance Matters for IFRS 9

IFRS 9 introduces a principles-based approach to ECLs, requiring significant judgment and the use of forward-looking information. This inherently increases reliance on complex models. SAMA’s stringent expectations aim to:

• Enhance Financial Stability: By ensuring models accurately reflect credit risk, SAMA helps safeguard the financial stability of individual institutions and the broader financial system.
• Improve Reporting Quality: Robust governance leads to more reliable and transparent financial reporting, providing stakeholders with a clearer picture of an institution’s financial health.
• Reduce Model Risk: It minimizes the risk of material errors, misstatements, or flawed decision-making arising from poorly developed, validated, or managed models.
• Promote Sound Risk Management: It fosters a culture of strong risk management, where models are understood, their limitations acknowledged, and their outputs used judiciously.

Conclusion

For financial institutions under SAMA’s purview, meeting the expectations on model governance under IFRS 9 is a continuous journey. It requires significant investment in technology, skilled personnel, and robust processes. By adhering to these expectations, institutions can not only ensure regulatory compliance but also enhance their ability to accurately assess and manage credit risk, thereby supporting sustainable growth and contributing to the resilience of the Saudi financial sector.

Talk to our IFRS 9 specialists to assess your model risk framework, validation practices, and governance readiness—before regulatory gaps become findings.