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FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management

A bank classifies its models by materiality: Tier 1 (annual full validation), Tier 2 (full validation every two years), Tier 3 (every three years). It has 12 Tier 1, 30 Tier 2 and 45 Tier 3 models, and each full validation takes the same effort. Assuming even scheduling, how many full validations are performed per year on average?

The bank performs 42 full validations per year on average: 12 for Tier 1 annually, 15 for Tier 2 (30 models every two years) and 15 for Tier 3 (45 models every three years). Summing the three tiers gives 42.

  1. A87
  2. B57
  3. C42Correct
  4. D12

Explanation

Tier 1: 12 per year. Tier 2: 30/2 = 15. Tier 3: 45/3 = 15. Total = 12 + 15 + 15 = 42. Counting all models once a year gives 87, which ignores the tiered frequency. 57 omits Tier 3 reduction (treats Tier 3 as 30? actually 12+15+30) and 12 counts Tier 1 only.

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