Models are an integral part of decision-making within UAE banks for risk management, business decisions and accounting. Banks employ models to comply with several regulatory and accounting requirements, including, but not limited to: (i) IFRS9 accounting requirements, (ii) capital forecasting, (iii) Pillar II capital assessment, (iv) regulatory stress testing requirements, (v) risk management of capital market activities and (vi) valuation adjustments. In addition, banks employ models to manage their business effectively, for instance with pricing models, portfolio management models and budgeting models.
1.2.2
When using models to support decisions, banks are exposed to potential losses occurring from making decisions based on inappropriate models or the incorrect usage of models. This potential loss and the associated adverse consequences are referred to as Model Risk. Further details are provided in the definition section.
1.2.3
In light of this large and complex landscape, the MMS has three key objectives. The first objective is to ensure that models employed by UAE banks meet quality standards to adequately support decision-making and reduce Model Risk. The second objective is to improve the homogeneity of model management across UAE banks. The third objective is to mitigate the risk of potential underestimation of provisions and capital across UAE banks.