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Core ConceptsModel limitations

Model limitations and assumptions

Known constraints, simplifications, judgments, data boundaries, and conditions that affect where a model is reliable. They should be documented, communicated to users, reflected in approvals, monitored, and mitigated when material.

Last updated: Last reviewed by: Model Risk Directory editorial team

How the term is used in model risk management

Known constraints, simplifications, judgments, data boundaries, and conditions that affect where a model is reliable. They should be documented, communicated to users, reflected in approvals, monitored, and mitigated when material. The exact implementation varies by institution, model type, risk rating, and governing framework. Use the linked regulatory pages and buyer guides below for scope-specific requirements.

Related glossary terms

Model uncertaintyModel documentationModel approval

Guides and frameworks that use this term

GuideModel Risk ManagementModel risk management (MRM) is the discipline of identifying, measuring, and controlling the risk that a bank's quantitative models produce incorrect or misused results. An MRM advisory firm helps build or run that discipline: model inventory, tiering, governance, and independent validation, rooted in Federal Reserve SR 26-2 (formerly SR 11-7) and OCC guidance.GuideModel Risk ValidationModel risk validation is the independent testing of a specific model's conceptual soundness, ongoing performance, and outcomes, performed by staff or a third-party firm genuinely separate from that model's development. It is the 'effective challenge' function required under SR 26-2 and SR 11-7, distinct from broader model risk management program design.FrameworkSR 26-2SR 26-2, issued jointly by the Federal Reserve, OCC, and FDIC on April 17, 2026, is the current US interagency guidance on model risk management. It supersedes SR 11-7 (2011) and SR 21-8 (2021), preserving core disciplines like effective challenge and independent validation while shifting to a risk-based approach tailored to an institution's model risk profile, size, and complexity.FrameworkOSFI E-23OSFI E-23 is Canada's enterprise-wide model risk management guideline for federally regulated financial institutions. The final 2025 guideline takes effect on 1 May 2027 and applies a risk-based approach across model identification, inventory, risk ratings, lifecycle governance, independent review, monitoring, third-party models, and decommissioning.