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

A bank uses a vendor model whose vendor releases a major update. Internal validation was completed on the prior version. Which action best fits supervisory expectations?

The bank should review the vendor's changes and revalidate as far as they affect performance or use, updating the inventory and documentation before relying on the new version. Prior validation does not cover changes, and a vendor certificate or waiting for the annual cycle is insufficient.

  1. AContinue using it, since the earlier validation still covers the vendor's product
  2. BReview the changes and revalidate to the extent they affect the model's performance or use, with the model inventory and documentation updated, before relying on the new versionCorrect
  3. CDefer review until the next scheduled annual validation regardless of the changes
  4. DAsk the vendor to certify the update and treat the certificate as validation

Explanation

Material changes to a model, including vendor updates, require appropriate review and validation before reliance, and the inventory and documentation should be updated. Waiting for the annual cycle or accepting a vendor certificate leaves unvalidated changes in use.

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