Definition
A governance framework — well established in banking for traditional financial models — that has been formally extended to AI and machine learning systems, requiring organisations to identify, validate, monitor, and control risks arising from automated decisions made by models. The Reserve Bank of India's 2026 draft guidance is one of the most comprehensive central bank implementations, mandating board-approved policies, independent model validation, and a mandatory 'kill switch' to immediately suspend any AI model that poses excessive risk. Banks remain accountable for all model risk even when they use a third-party AI vendor's system.
Why it matters
Regulated financial institutions globally are facing new requirements to treat AI models with the same rigour as financial risk models — meaning board-level sign-off, audit trails, and the ability to shut any AI system down instantly, with accountability that cannot be outsourced to a vendor.