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

A bank purchases a vendor credit model whose code is proprietary and the vendor refuses to disclose the details. According to supervisory guidance, what is the most appropriate response by the bank?

The bank should still validate the vendor model as far as it can, using outcomes analysis, benchmarking and sensitivity testing, and keep contingency plans. Vendor models are not exempt from model risk management, and marketing material is not validation evidence.

  1. AExempt the model from validation because the vendor is responsible
  2. BValidate it as far as possible using outcomes analysis, benchmarking and sensitivity testing, and have contingency plansCorrect
  3. CUse the model only for non-material decisions without any review
  4. DRely on the vendor's marketing materials as validation evidence

Explanation

Vendor models are subject to the same model risk management principles. When code is not available, the bank should still test the model with ongoing monitoring, benchmarking, sensitivity analysis and outcomes analysis, and should prepare contingency plans. Exemption or reliance on marketing is not acceptable.

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