Banking Documentation
Executive Summary
Key Takeaways
- ✓ Banking documentation must satisfy general model documentation discipline while also evidencing bank-specific requirements — regulatory assumption sourcing, model risk tier and rating, and validation/approval history.
- ✓ Regulatory-linked assumptions (risk weights, capital thresholds, liquidity run-off rates) should be documented with their specific regulatory or internal source, not presented as though self-evidently correct without a traceable origin.
- ✓ A model's assigned risk tier and rating should be documented alongside the model itself, so a reviewer can immediately see what level of governance and monitoring the model is subject to without consulting a separate, disconnected inventory record.
- ✓ Validation and approval history should be documented as part of the model's own record — when it was last validated, what findings resulted, and what approval authority signed off — not maintained only in a separate governance system disconnected from the model itself.
- ✓ Undocumented regulatory assumption sourcing is one of the most common findings in a bank model review, since an assumption presented without its source cannot be independently confirmed as current or correctly applied.
Objective¶
This guide covers what documentation for a bank model should evidence beyond general model documentation discipline, within Banking Model Risk, extending the general Model Documentation Standards guide.
Regulatory Assumption Sourcing¶
Regulatory-linked assumptions — risk weights (see Risk Weighted Assets), capital thresholds (see Basel Capital Ratios), and liquidity run-off rates (see Liquidity Coverage Ratio) — should be documented with their specific regulatory or internal source and the date that source was last confirmed current, not presented as though self-evidently correct without a traceable origin. An assumption without a documented source cannot be independently confirmed as still applicable, particularly as regulatory frameworks and thresholds are periodically updated.
Risk Tier and Rating¶
A model's assigned risk tier and rating — established through the tiering methodology — should be documented alongside the model itself, not held only in a separate governance system record. A reviewer examining the model directly should be able to see what level of governance and monitoring it is subject to without needing to cross-reference a disconnected inventory system.
Validation and Approval History¶
The model's documentation should include its own validation and approval history — when it was last validated, what findings resulted, and which approval authority signed off on its production use. Maintaining this history as part of the model's own record, rather than solely in a separate governance system, ensures anyone reviewing the model directly has immediate access to its review provenance.
Why This Matters: The Most Common Finding¶
Undocumented regulatory assumption sourcing is one of the most common findings in a bank model review. Regulatory-linked assumptions are frequently carried forward from a prior period's model, or copied from another model entirely, without the sourcing rationale being re-documented at the point of reuse — leaving a gap between the assumption's presence in the model and any traceable justification for why it is the correct figure to use.
Common Construction Pitfalls¶
- Presenting regulatory-linked assumptions without a documented source or confirmation date.
- Maintaining a model's risk tier and rating only in a separate governance system, disconnected from the model's own documentation.
- Omitting validation and approval history from the model's own record.
- Carrying forward a prior period's regulatory assumptions without re-documenting or re-confirming their sourcing.
Continue Reading¶
Prerequisites¶
- Banking Model Risk — the parent guide
- Model Documentation Standards
Related Technical Guides¶
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Frequently Asked Questions
What does banking documentation need beyond the general model documentation standard?
Evidence of regulatory-linked assumption sourcing, the model's assigned risk tier and rating, and its validation and approval history — bank-specific requirements the general model documentation standard does not itself specify.
Why does regulatory assumption sourcing need explicit documentation?
Because an assumption like a risk weight, a capital threshold, or a liquidity run-off rate cannot be independently confirmed as current or correctly applied if it is presented without a traceable source — documentation should identify exactly where each regulatory-linked assumption came from and when it was last confirmed current.
Why should a model's risk tier be documented alongside the model itself?
So a reviewer can immediately see what level of governance and monitoring the model is subject to without needing to separately consult a disconnected inventory or governance system record — the tier and rating are directly relevant context for interpreting the model's own outputs and review history.
What validation and approval history should be documented?
When the model was last validated, what findings resulted from that validation, and what approval authority signed off on its use — maintained as part of the model's own record, not only in a separate governance system a reader of the model itself would not necessarily see.
Why is undocumented regulatory assumption sourcing such a common finding?
Because regulatory-linked assumptions are often carried forward from a prior period's model or copied from another source without the sourcing rationale being re-documented at the point of reuse, leaving a gap between the assumption's presence in the model and any traceable justification for it.
How does this guide relate to the general Model Documentation Standards guide?
This guide extends that general standard with the specific bank documentation requirements — regulatory assumption sourcing, risk tier, and validation history — that a general-purpose model documentation standard does not itself address.
Related Articles
Banking Model Risk
Model risk in banking is a distinct, heavily formalized discipline, because banks rely on models for decisions with direct regulatory and financial stability consequences — credit decisions, capital adequacy, and liquidity management chief among them. This guide extends the general Model Risk pillar with the banking-specific model taxonomy (credit, valuation, capital, liquidity models), the three-lines-of-defense structure common to bank model risk management frameworks, and why banking model risk management is typically more formalized than in most other industries.
Regulatory Model Governance
Regulatory model governance is the framework a bank uses to inventory, tier, approve, and monitor every model it relies on for a material business or regulatory purpose. This guide covers the core components of that framework — a comprehensive model inventory, a risk-based tiering methodology, a formal approval process before a model is used in production, and ongoing performance monitoring — and why an incomplete inventory is the single most common gap regulators identify in bank model governance frameworks.
Model Documentation Standards for Financial Models
Model documentation standards define what written records must accompany an institutional financial model to enable its outputs to be understood, verified, and relied upon by parties other than its original developer. The minimum documentation package for an institutional financial model includes an assumption log recording the source and rationale for every input, a version history recording all material changes, a model map describing the structure and purpose of each worksheet, instructions for use, and a disclosure of known limitations. The ICAEW Financial Modelling Code and the FAST Standard both establish specific documentation requirements that define institutional expectations.
Basel Capital Ratios
The Basel III framework defines three core capital ratios — Common Equity Tier 1, Tier 1, and total capital — each measured against risk-weighted assets, layered with additional capital buffers above the hard minimums. This guide sets out the ratio definitions, the minimum and buffer levels the framework establishes, and how a bank model should represent each ratio and buffer as a distinct, named threshold rather than a single blended capital requirement.
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) tests whether a bank holds enough high-quality liquid assets to survive a defined 30-day acute stress scenario. This guide covers how to model the LCR's two components — the stock of high-quality liquid assets and net cash outflows under the stress scenario — and how the deposit and funding behavioural assumptions built elsewhere in the model feed directly into the outflow calculation.