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Model overlay

A documented adjustment applied to a model output to address known limitations, unusual conditions, missing factors, or judgment. Overlays require rationale, approval, monitoring, outcomes analysis, and an exit or recalibration plan.

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

How the term is used in model risk management

A documented adjustment applied to a model output to address known limitations, unusual conditions, missing factors, or judgment. Overlays require rationale, approval, monitoring, outcomes analysis, and an exit or recalibration plan. 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 limitations and assumptionsExpected credit loss modelOverride analysis

Guides and frameworks that use this term

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.GuideModel Risk Management FrameworkA model risk management framework is the documented set of policies, roles, and processes an institution uses to identify, tier, govern, and validate its models. Under SR 26-2, a sound framework covers model development and use, independent validation, and governance and controls, scaled to the institution's size and model risk profile rather than applied uniformly.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.FrameworkPRA SS1/23PRA SS1/23 is the Bank of England Prudential Regulation Authority's supervisory statement setting out five model risk management principles for UK banks with internal model approval for credit, market, or counterparty credit risk. It took effect May 17, 2024 and explicitly extends to risks from AI and machine learning modeling techniques.