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

A bank maintains a model inventory. An internal audit finds that several spreadsheet tools used to price illiquid positions are not listed because they are 'just calculators'. Which conclusion best reflects the supervisory guidance?

Spreadsheet tools that apply quantitative methods to turn inputs into quantitative estimates meet the model definition, so they should be in the inventory and risk-tiered. The tool's format or builder does not matter, only its function.

  1. AThey can be excluded because spreadsheets are not models
  2. BThey should be assessed against the model definition, and if they apply quantitative methods to produce quantitative estimates, they belong in the inventory with risk-tieringCorrect
  3. CThey need inclusion only if they were built by the IT department
  4. DThey need validation only if the output exceeds a fixed dollar threshold set by regulators

Explanation

The definition of a model depends on function: a quantitative method, system or approach applying theories and assumptions to turn inputs into quantitative estimates. Format (spreadsheet) is irrelevant. Inventory entries should support risk-based tiering of validation effort; no fixed regulatory dollar threshold exists, and the builder is irrelevant.

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