Risk-Based Supervision Still Starts With Strong Model Governance

The Federal Reserve’s new supervisory operating principles that were released last month (https://lnkd.in/dvsqn8vs) mark another meaningful step in what has been a steady, months-long shift in regulatory tone, one that emphasizes material financial risks, clearer communication, and a more pragmatic supervisory posture. 

This direction is consistent with what many of us have already been seeing across agencies recently, which is a push to focus on what truly affects safety and soundness, rather than getting bogged down in lower-impact process issues. As someone who spends most days deep in CECL, ALM, liquidity stress testing, and BSA/AML model validation, this evolution resonates. A well-executed, risk-based approach is exactly how effective oversight should work.

That said, I’ve also seen the other side of this in dozens of validations. Gaps that appear “immaterial”, such as documentation inconsistencies, unclear or unsupported assumptions, missing support for overlays, etc., often end up being symptoms of broader weaknesses in an institution's model governance framework. These aren’t always the issues that drive headlines, but they’re often the issues that cause a model to drift, become misunderstood internally, or fail under stress.

So while I agree with the Fed’s pivot toward focusing on true safety-and-soundness risks, it’s still important for institutions to maintain a solid governance foundation. Strong documentation, transparent assumptions, reproducible processes, and disciplined oversight are what allow a risk-based supervisory approach to work in the first place.