FRM Part II · FRM Exam Part II · Supervisory Guidance on Model Risk Management
A bank wants to use a model that failed validation on one assumption, but the business argues the model is needed immediately. Which approach is most consistent with the guidance?
Use should be limited and governed: document the finding, apply compensating controls such as conservative adjustments and tighter limits, set a remediation timeline, and get approval from appropriate governance. Hiding the issue or letting the developer waive it would breach model risk guidance.
- AApprove use without documenting the issue to avoid confusion
- BAllow limited use only with documented compensating controls such as conservative adjustments, tighter limits and a remediation timeline, with approval by appropriate governanceCorrect
- CDelay all remediation until the next annual review
- DLet the model developer waive the validation finding
Explanation
The guidance accepts that models may be used with known limitations if these are understood, documented and mitigated through overlays, conservative adjustments or limits, with oversight and a timeline for fixes. Undocumented use, deferred remediation or developer waivers defeat effective challenge.
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