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FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A bank wants to use a complex machine-learning model for retail credit decisions. Under supervisory model risk guidance, which step is most essential before deployment?

The bank should obtain independent validation that assesses conceptual soundness, outcomes analysis and ongoing monitoring, and documents model limitations. Supervisory guidance requires effective challenge from parties independent of development, which developer approval, vendor claims or in-sample fit alone cannot provide.

  1. AIndependent validation covering conceptual soundness, outcomes analysis and ongoing monitoring, with documentation of limitationsCorrect
  2. BApproval by the model's developers, who know it best
  3. CReliance on the vendor's marketing claims of predictive power
  4. DValidation limited to in-sample fit statistics on the development data

Explanation

Supervisory guidance requires effective challenge by independent validators, evaluating conceptual soundness, ongoing monitoring and outcomes analysis, with limitations documented. Developer self-approval, vendor claims and in-sample statistics alone do not provide independent challenge or out-of-sample evidence.

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