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

A bank purchases a vendor model whose code and methodology are proprietary. How should the bank approach validation under supervisory guidance?

The bank must validate the vendor model much like an internal one, using whatever vendor information is available plus its own benchmarking, testing and outcomes analysis, and should keep contingency plans if the vendor stops support. Responsibility for model risk stays with the bank, not the vendor.

  1. ASkip validation because the vendor is responsible for performance
  2. BValidate only the vendor's marketing documentation
  3. CDelay validation until regulators request it
  4. DValidate it as it would an internal model, using available vendor information, benchmarking and outcomes analysis, and develop contingency plans if the vendor ceases supportCorrect

Explanation

Guidance states vendor models should be validated by the bank, with the bank requiring appropriate documentation, testing with its own data, ongoing monitoring and benchmarking, and having contingency plans. Responsibility cannot be outsourced to the vendor.

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