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Keisha Ta-Asan - The Philippine Star
June 29, 2025 | 12:00am
Bangko Sentral ng Pilipinas (BSP)
BusinessWorld / File
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has released the proposed guidelines aimed at enhancing how banks and financial institutions manage model-related risks to strengthen operational resilience amid the increasing use of complex algorithms in the sector.
In a draft circular posted on its website, the central bank outlined the requirements for BSP-supervised financial institutions (BSFIs) to establish a comprehensive framework for model risk management (MRM), covering all stages of a model’s life cycle.
“With the increasing adoption of sophisticated models, the potential for model risk is amplified,” the BSP said.
“Consequently, BSFIs are expected to establish and maintain a sound framework for the effective management of model risk commensurate with their size, operational complexity, risk profile, and extent of model usage,” it added.
The proposed guidelines come as more financial institutions rely on quantitative models, including those using artificial intelligence (AI) and machine learning, to inform credit decisions, risk management, pricing, and even regulatory compliance.
While these tools can offer improved insights and efficiency, the BSP warned that flawed models or misuse of outputs may lead to “financial losses, poor strategies/decisions and reputational damage to the BSFI.”
Under the draft circular, models are defined as “quantitative method[s], system(s), or approach(es) that apply statistical, economic, financial, or mathematical theories... to process input data into output.” Model risk, on the other hand, is described as “the potential adverse consequences from decisions based on compromised model output.”
The BSP is mandating all BSFIs to adopt an MRM framework with key components such as model governance, development, validation, implementation and performance monitoring. The framework should enable institutions to “identify, measure, mitigate, monitor as well as report model risks” at both entity and group levels.
“The MRM framework must be commensurate with the BSFI’s size, complexity of operations, risk profile and extent of model use,” the central bank said.
“Larger and more complex BSFIs that rely on sophisticated models are expected to implement a more comprehensive MRM framework,” the BSP said.
Branches of foreign banks will also be covered, either under their own localized frameworks or through group-wide systems, provided that models approved by their parent institutions are “appropriate for (local) domestic requirements.”
A two-year transitory period is proposed. BSFIs are expected to develop a formal implementation program within one year from the issuance of the circular. This should include “a detailed plan of action with specific timelines and the status of initiatives undertaken to develop their respective MRM framework.”
The BSP also said it would conduct supervisory reviews of BSFIs’ frameworks as part of its risk-based supervisory approach, with focus on “the soundness and comprehensiveness of the MRM framework, as well as its ability to manage risks arising from the use of models.”
The deadline for the submission of comments on the draft circular is on July 4. Once finalized, the circular will take effect 15 calendar days after publication in the Official Gazette or a newspaper of general circulation.
