SR 11-7
Federal Reserve guidance on model risk management applicable to AI/ML in banking.
Definition
SR 11-7 is the Federal Reserve's Supervisory Guidance on Model Risk Management, issued in 2011. While predating modern AI/ML, it remains the foundational regulatory framework for managing model risk in US financial institutions and has been interpreted to apply to AI systems.
Key principles:
- Model definition: Any quantitative method that processes input data into quantitative estimates—including AI/ML
- Three lines of defense: Model developers, independent validation, and internal audit
- Effective challenge: Critical analysis by qualified, independent parties
- Documentation: Comprehensive records of model purpose, design, limitations, and testing
Banks must demonstrate that AI models meet SR 11-7 standards, creating significant compliance requirements for AI adoption in financial services.
Sources
- •Federal Reserve SR 11-7
- •OCC 2011-12
Related Terms
Model Risk Management (MRM)
Financial services framework for managing risks from quantitative models including AI/ML....
Model Governance
Enterprise framework for oversight, approval, and lifecycle management of AI/ML models....
Third-Party Audit
Independent evaluation of AI system compliance by an accredited external body rather than the provider itself....