KPMG has released a new guide titled “Model Risk Management: A Guide for Financial Institutions in Saudi Arabia,” which serves as an essential tool for the Kingdom’s financial sector amidst its rapid expansion and digital evolution. This publication arrives at a pivotal moment, to equip financial institutions with the necessary strategies and insights to navigate through an increasingly complex industry landscape characterized by technological advancements and regulatory shifts.
Shadi Abuserryeh, partner and head of financial risk management at KPMG in Saudi Arabia, said: “As Saudi Arabia’s financial sector continues to grow and transform, the need for robust model risk management has never been more critical. This guide provides the tools and insights necessary for banks to navigate these regulatory landscapes, ensuring they are well-equipped to manage risks effectively and maintain trust among their stakeholders.”
The guide addresses the growing dependency of banks in Saudi Arabia on third-party services for model development and validation. It underscores the critical need for thorough documentation and continuous real-time monitoring to ensure the reliability and transparency of these externally developed models. Emphasizing robust governance, the guide advocates for vigilant oversight of both in-house and outsourced models, enabling institutions to proactively detect and address potential issues before they escalate.
A significant focus is placed on the integration of advanced models that account for climate risks and expected credit losses, which often rely on external variables and limited historical data. This complexity requires a sophisticated blend of qualitative approaches and expert judgment to ensure accuracy and reliability.
The guide also prepares financial institutions for forthcoming regulations from the Saudi Central Bank, similar to those recently enacted by the UAE’s Central Bank, aimed at elevating model quality and mitigating associated risks.
The document further explores the heightened risks during periods of exceptional growth or economic stress. Factors such as rapid market shifts and changing consumer behaviors can increase data volatility, challenging the accuracy of model predictions. The scarcity of robust historical data during these times diminishes the reliability of models, and the growing complexity needed to capture such dynamic environments can lead to errors and complicate interpretation efforts. Additionally, as the reliance on these models intensifies for critical decision-making, the likelihood of inaccuracies rises, potentially leading to rushed development and validation processes.
Despite these challenges, the guide identifies significant opportunities for the Saudi financial sector. “By effectively addressing these issues, institutions can enhance their risk management capabilities and resilience against adverse conditions. The adoption of cutting-edge technologies offers potential improvements in efficiency and precision in managing risks. Furthermore, compliance with new regulatory standards can boost governance and transparency, fostering greater trust among stakeholders,” said Ovais Shahab, head of financial services — Saudi Arabia at KPMG Middle East.
