C3.6 Regulatory model discipline

Market-risk and banking-book standards [5]; credit principles 2025 [19]

What it requires. A model used for a decision is legitimate only while its tests pass, and the tests are named in advance. Backtesting counts, over a stated window, the occasions on which the outcome exceeded the model's own stated bound, with green, amber and red zones, a consequence for each and a fallback method when the red zone is entered. Attribution asks whether the model's picture of the drivers explains what actually happened, per unit of accountability. An outlier test compares the result under prescribed shocks with a stated base. And whatever can be summed is summed once, across all books and entities, against one limit written before the exposure existed, with every excess recorded. The parameters are the organization's own.

Where it comes from. The market-risk standard [5] treats a model as a license renewed by evidence: over two hundred and fifty days the exceptions to the model's own estimate are counted, a few keep the license, more cost capital, and past a stated number the desk falls back to a simpler approach; a second test asks whether the model's picture of the risk factors explains the desk's actual results; the banking-book standard prescribes six interest-rate shocks and an outlier test. The 2025 credit principles [19] require exposure to one obligor or group to be measured in aggregate, across books and entities, against one limit set before the exposure is taken.

What it reconciles. The component takes the gates and leaves the staircases: zones, attribution and the aggregated limit are general; the confidence levels and the number of exceptions are calibrations that belong to a jurisdiction. It generalizes the aggregated limit to anything that can be summed, a supplier dependence, a customer concentration, a reliance on one cloud region, which chapter 12 named as one of the three ideas finance gives to everyone. A hospital's bed-demand model can be backtested with zones exactly as a trading model is.